It's understood City boss Ruaidhri Higgins and his assistant Alan Reynolds travelled to Scotland this week as they ramp up their search for a replacement for ex-skipper Eoin Toal who signed for Bolton Wanderers last week.
Connolly, who was voted the SWI/SSE Airtricity Player of the Month for June, recently returned to Tannadice following the conclusion of his six month loan spell at Oriel Park.
Dundalk boss Stephen O'Donnell claimed the 30 year-old Monaghan native's return to Oriel Park wasn't 'black and white' but the club would be 'doing their utmost to keep him'.
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Since his return to Scotland Dundee manager Jack Ross has made it clear the centre half isn't in his plans for the forthcoming SPL campaign.
"In terms of how I've been building the squad in preseason - and into the new campaign - it has very much been without Mark. That's how it was planned to be and that'll remain the case at the moment."
Derry are in the market for a defender and with several clubs both in the League of Ireland and Irish League keeping tabs on the situation, it would represent a major blow to Dundalk should Connolly opt for a move to a rival club.