The Gunners have been looking to seal a €20 million deal for the out-of-favour Bayern midfielder as Arsene Wenger hopes to add to the solitary summer arrival of Yaya Sanogo.
Despite strong interest from the Premier League side, Wolfsburg are hopeful of attracting Gustavo to the
Volkswagen Arena although Allofs is adamant there is no deal in place just yet.
He told reporters: "The chances are good but the deal is not done. To report that is just false."
Wolfsburg coach Dieter Hecking had earlier spoke of his optimism that a deal could be agreed for the Brazil international.
He told SID: "We can't confirm the transfer yet. He has been with the Selecao, so we haven't had more talks.
"But we hope he will decide for Wolfsburg. Of course we know there are several other clubs interested."
Martin Winterkorn, CEO of the VW Group who own Wolfsburg, put pressure on Hecking after he urged the side who finished 11th in Germany's top flight last season to sign the 26-year-old midfielder back in July.
Having already missed out on Gonzalo Higuain, who joined Napoli earlier in the transfer window, and with Liverpool adamant they will not allow Luis Suarez to leave for the Emirates Stadium, Wenger faces the prospect of missing out on another top target ahead of the start of the 2013-14 campaign.
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