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However, Dortmund ultimately refused to sanction a prized asset's departure for less than €120 million (£109m/$141m), which the Manchester outfit were not prepared to pay upfront in the current financial climate.
After the October 5 transfer deadline had passed, the Bundesliga giants' sporting directorMichael Zorc revealed Sancho would have been allowed to leave had their demands been met.
"We had clear agreements with him that he could make a transfer under certain circumstances, up to a certain point in time. And then the door closed," Zorc told Sky Germany.
Watzke says BVB made their position on Sancho very clear, and that their stance will not change at the end of the season, but didn't mention United directly when discussing the ongoing transfer saga.
He told ZDF Sports: "They misjudged the situation. We would be more willing to compromise. We had a clear line and will continue to do so next summer.
"In this industry, you can never say that a player is completely unsellable."
Asked if he ever doubted that Sancho would remain at Westfalenstadion for at least one more season, Watzke responded: "I heard and read everywhere in the spring that Sancho was gone. But he's here.
"We had an agreement with him and it didn't look like that."
The Red Devils are already being tipped to revive their interest in the 20-year-old in January, but Dortmund have no plans to allow him to leave midway through the current campaign - according to reports in Germany.
Sancho still has three years left to run on his current contract, and has featured prominently for Lucien Favre's side at the start of the new season.