The Premier League leaders can take the Brazilian back to the Etihad this summer for a fee of around £25million, as per the terms of the deal which saw Luiz join Villa for £15million in 2019.
Villa remain confident of keeping the 22-year-old and it is currently thought unlikely City will take up their option, which expires during the next transfer window.
But when quizzed on the matter after watching his team win 2-1 at Villa Park on Wednesday night, Guardiola declined to rule it out.
He said: “There are a lot of people at the club working about these kind of players and at the end of the season we are going to take a decision.
“I have many things in my head for these five or six weeks. All of us have.
“We’ve fought a lot to be here, to be in the Champions League semi final for only the second time.”
Luiz joined City from Vasco De Gama in 2017 but never played a minute for the club after failing to secure a work permit, instead spending two seasons on loan in Spain with Girona.
Since joining Villa he has gone on to make 63 Premier League appearances and become a key part of Dean Smith’s team. He has also broken into the senior Brazil squad.
Guardiola said: “He’s played a lot of minutes, important for Villa. A guy who is clever with the ball, physically strong. A lovely guy.
“Unfortunately he could not play with us because of the work permit but he is developing really well and I’m happy for him.
“Tonight when he was involved in the game both defensively and offensively he was good.”
Villa midfielder John McGinn, meanwhile, hopes his goal against in Wednesday’s defeat to City is the first of several between now and the end of the season.
McGinn netted for only the second time in the Premier League this season when he fired the hosts ahead inside 21 seconds. It was the Scotland international’s first goal in the top flight since scoring in Villa’s 7-2 demolition of Liverpool in October.
McGinn said: “It has been bugging me a lot. I have been trying so hard to get on the scoresheet.
“It has been happening for Scotland but not for Villa. Hopefully I can add to it. I know it is in my locker, whether I have been timing the run at the wrong time or taking the shot too early.
“Thankfully on Wednesday it went in and hopefully I can have a strong end to the season."
Despite the bright start Villa were eventually beaten through goals from Phil Foden and Rodri and McGinn admitted: “I am glad to have ended the goal drought but I would have swapped it for a positive result."