Walcott was in dispute over a new deal with the player wanting to be played as a centre forward by Arsene Wenger.
The news may prompt Wenger to become active again in the transfer market.
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Since Guus Hiddink arrived at the helm, Chelsea have improved considerably after a tricky start to the campaign.
Newcastle United are staring down the barrel of relegation to the Championship for the second time in the past eight years.