Dembele’s deal at the Camp Nou expires at the end of this season but discussions to extend his contract have dragged on for months.
The 24-year-old’s agent, Moussa Sissoko, says his client will not be bullied into signing a new contract as Barcelona have threatened to ostracize Dembele from the first team picture if he does not pen fresh terms.
"What I can say is that we are making a difficult decision. If he does not renew, the club has decided they will make a decision," Xavi told reporters ahead of Thursday's Copa del Rey clash with Athletic Bilbao.
"We've waited a long time. We have been in talks with him for five months.
"Either he renews or we look for an exit. In the end, the club has decided that if he does not renew, a solution must be found.
"We have to do what is best for the club. [Sporting director] Mateu Alemany has been talking with him and his representatives for months.
"It's not a pleasant situation for anyone, but what's clear is that the interests of the club must prevail here.
"He told me he wants to stay. It's a question for him. I've been really clear; I can't be more concise. Either he renews, or we look for an exit. It's all or nothing."
Dembele, whose Barcelona career has been blighted by injuries since joining from Borussia Dortmund in the summer of 2017, has made 11 appearances in all competitions this season, scoring one goal.
