Nelson enjoyed an impressive loan spell at Hoffenheim last season and the winger is keen for regular first-team action this year.
Emery is desperate for reinforcements before the transfer window closes and he has identified Palace star Wilfried Zaha as his No.1 target.
The Gunners are struggling to raise the funds to meet the £80m asking price and they upped the bid to £55m this week, throwing in Nelson on loan as a sweetener.
Palace rejected the offer, making it clear they will not be bullied into lowering their demands.
It’s unclear whether Arsenal intend to improve their offer with more money or additional players in exchange.
But their next bid may not involve Nelson, as according to The Sun he could be on his way back to the Bundesliga.
The report claims the 19-year-old is attracting interest from Hertha Berlin.
Nelson scored seven times for Hoffenheim last season despite largely being used as an impact substitute.
“£80m is a lot of money.”
Crystal Palace hero Clinton Morrison
His performances have caught the eye of Hertha and they want to bring him in on a season-long loan.
The Sun claim Emery is set to make his mind up about Nelson’s future.
With Arsenal struggling to bring in their top targets, the England under-21 international may be needed.
As it stands, Zaha looks set to stay at Selhurst Park next season and Eagles hero Clinton Morrison believes Aaron Wan-Bissaka’s move to Manchester United is the reason behind Palace’s stubbornness.
“£80m is a lot of money,” he told talkSPORT.
“But I feel the chairman is only doing that because he doesn’t want to lose Zaha and Aaron Wan-Bissaka in the same window.
“It could be a long hard season if we lose both of them and we don’t improve the squad.
“If Palace do lose him I am really worried about what it’s going to be like for Palace this coming season.”