The 30 year-old Clones native is on the radar of City boss Ruaidhri Higgins who is understood to have travelled to Scotland alongside assistant manager Alan Reynolds this week in an attempt to sign the defender.
Connolly, who was voted the SSE Airtricity Player of the Month for June, has been told he's not part of Dundee manager Jack Ross' plans for the forthcoming SPL campaign.
Seen as a direct replacement for ex-City skipper Eoin Toal who signed for Bolton Wanderers last week, Connolly's signing would represent a huge blow to Dundalk and a real signal of intent from Derry City.
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Dundalk have given up hope of re-signing the player and after completing the signing of 24 year-old defender Robbie McCourt from Sligo Rovers today, Lilywhites boss Stephen O'Donnell said it was 'unfortunate' Connolly wouldn't be returning to the club.
“Mark was brilliant for us and we were great for Mark,” said O’Donnell. “It was a six-month loan but it felt like a lot longer than that because he really immersed himself in the group.
“It’s unfortunate that all parties couldn’t come to an agreement but that’s football. We move on in our direction and Mark will move on in his direction.
“We wish him all the best. He was a great person in the dressing room and a brilliant player in his 20 odd games for Dundalk but football moves on and the club moves on and we’re delighted with Robbie’s addition.”
This latest development certainly opens the door for Derry but it's understood there remains interest from various other Irish clubs.