Niang joined AC Milan in 2012 but has struggled to make an impact in Serie A.
The 22-year-old has just three goals in 18 appearances this season but Arsenal have earmarked Niang as a transfer target and competition for Olivier Giroud as the club's main striker.
Montella admits Niang's future at Milan is uncertain and will not feature in their Coppa Italia quarter-final against Juventus tomorrow.
M'Baye Niang could leave AC Milan this month
The 22-year-old has struggled to make an impact at AC Milan
"Niang might leave the club," Montella told Milan TV.
"He’s discussing it with the management. He won’t be called up for the game against Juve as I thought he would definitely have been distracted."
And the Milan boss spoke further about the future of Niang and suggested his form has tailed off in recent months.
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"He's always been involved in normal situations," Montella added. "Sometimes he's been on the fringes but he's never been out. As long as he's a Milan player he'll get the consideration he deserves.
"He has made himself available right from the start and he's trying to grow so he can manage his talent better.
"He's a player who has had his ups and downs and there are things he needs to improve. We tried, and we got to a point where we were delighted with the results – the boy was, too – and I'm not talking about technical results.
"He got to a certain point and then stopped, and I won't pretend to know why, nor do I want to say."