The Hyde hitman hoped to take on the brilliant Filipino, recognised as the world's best fighter, on home turf in front of a huge crowd next May.
While a sell-out in London is assured - fighting outside America presents a host of broadcasting problems.
The pair look increasingly likely to meet in the ring - talks are ongoing with Pacquiao's camp while a Hatton rematch with Floyd Mayweather Jr remains as unlikely as ever - but Hitman's lawyer, Gareth Williams, accepts American TV requirements could mean the fight will be staged in the States.
Williams said: "It is going to come down to lots of external factors.
"One of the major factors is American TV. We're going to have to sit down and talk to them about where they want the fight to be.
"In an ideal world, we would want the fight to be in the UK. But if financially it doesn't make sense, then it won't be."
Hatton's promotional partners Golden Boy Promotions are handling negotiations with Pacquiao's team.
Pacquiao's promoter Bob Arum said: "We are in negotiations with the Hatton people, and I think we're moving closer.
"I can assure you it will not be at Wembley."
Golden Boy chief executive Richard Schaefer is upbeat about the chances of the fight being made.
"I'm encouraged by the way it's going - and I'm talking to the Hattons," he said.
"You really have two of the most popular fighters of their generation fighting each other, and that's the kind of fight we want to make."
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PatBlackFlash (22/12/2008 at 13:58)
Mind you, a defeat against the under sized Pacquiano would certainly dent his credibility and future earnings, so maybe he is right to chase the $$$$
Can't see many going over to Vegas though, what with the dollar at 1.4 against the pound, credit crunch, and most of the tickets likely to be priced at $1000.