Club manager Jose Manuel Llaneza told the national news agency Efe that contacts were made and "as is logical between two clubs that get on, an agreement was reached."
Pellegrini would replace Juande Ramos, who took over at Real Madrid midseason after Bernd Schuster was fired.
On Saturday, the Chilean said he had not had any contact with Real Madrid over a potential move to the club.
A spokeswoman for Villarreal said there had been contacts with Real Madrid but insisted there was no official confirmation of the deal.
Pellegrini has transformed Villarreal since arriving in 2004. The club finished fifth in La Liga this season, clinching a place in next season's Europa League, formerly the UEFA Cup.
Madrid finished second to Barcelona and was eliminated in the first knockout stage of the Champions League for the fifth straight season.
Recent reports have said incoming Real Madrid president Florentino Perez plans to present Pellegrini on Tuesday and Milan's Kaka as the club's new star player Thursday.
Perez was due to be confirmed as club president later Monday. He is the only candidate for elections that had been scheduled to be held on June 14.
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