The Premier League side are keen to sell the 29-year-old, who has just one year remaining on his current contract.
Granada’s sporting director Juan Carlos Cordero told Spanish sports newspaper Marca: “We like Michu a lot.
“We have spoken to him, and with his agent, but there is no agreement nor have we begun negotiations.
“He would be a very important player for Granada but he has a contract with his club. We have players in that position and we also have a budget that we must respect.”
Michu enjoyed an impressive first season in England scoring 22 goals during 2012/13, following his £2m move from Rayo Vallecano.
His strong performances saw him capped by Spain and helped Swansea qualify for Europe by winning the Capital One Cup.
However, his second season was disrupted by injury and he scored only six times in 25 games.
The Spaniard was sent out on loan to Napoli last season but an injury-plagued campaign saw him make just five appearances for the Serie A club.
If Michu completes a move to Granada, he would link up with former manager Jose Ramon Sandoval who coached him during his time at Rayo Vallecano.
“He has a very good relationship with Sandoval,” added Cordero. “He was the one that gave him the opportunity to play in the Primera Division and he had a great season at Rayo working with Sandoval.”
Granada narrowly avoided relegation by finishing 17th in La Liga last season.