Former manager Kevin Blackwell is preparing for a court battle with Leeds in his fight for compensation.
Blackwell, who led Leeds to the brink of the Premiership last season, believes he has no option other than to sue the Yorkshire club after he was sacked two months ago.
Leeds chairman Ken Bates has declined to enter into compensation talks with Blackwell's representatives, the League Managers Association.
'We would have preferred to keep it out of court,' LMA chief executive John Barnwell said.
'But it would appear Leeds don't want to negotiate a settlement.
'Mr Bates has said Kevin Blackwell was not dismissed because of poor results but for negative comments made in the press about the club's finances, but having looked closely at this case we feel we have no option other than to put the matter in the hands of our lawyers.'
Leeds issued a statement which read: 'In response to suggestions that former manager Kevin Blackwell is preparing to sue the club for wrongful dismissal, Leeds United can confirm that the matter is currently in the hands of our lawyers.
'No further comment will be made at this stage.'
Blackwell, who has remained tight-lipped since being sacked on September 20, is understood to have been stunned by the manner of his dismissal.
The former Sheffield United coach had steered Leeds to Coca-Cola Championship safety in his first full season in charge before narrowly missing out on promotion last season.
But the 47-year-old came under increasing pressure this time around as his side lost momentum and poor early results added to the fans' frustration following the 3-0 play-off final defeat to Watford.
'We have instructed Kevin Blackwell very clearly to make no comment at all,' Barnwell added.
'We had to find out what the comments he made in the press were and having seen them the matter has been passed onto our legal team.
'It does not necessarily mean it has to go to court.
'There may be a re-think by somebody who realises they have gone about this the wrong way - but we're not too optimistic.'
Blackwell, who succeeded Eddie Gray in June 2004 after spending 12 months as coach, was sacked after a 1-0 defeat at Coventry saw them slump to second-bottom in the table - their lowest ever league position.
Blackwell, a goalkeeper in his playing days with Boston, Scarborough, Notts County, Huddersfield and Plymouth, first arrived as coach in the summer of 2003 after being recommended to then manager Peter Reid.
But Reid lasted just eight months in charge and when Eddie Gray was sacked just six months after that, Blackwell became the club's fifth manager in under two years.