Friends of Mr Portillo said the former defence secretary was certain to be interested in standing for the Cities of London and Westminster seat. It will become vacant with the retirement of Peter Brooke, the former Northern Ireland secretary, who is stepping down from Parliament after a quarter of a century in politics.
The long-serving Tory MP told a meeting of his local Conservative Association: "I became a pensioner in March this year and it is much better to make the announcement of my retirement before others comment on my advancing years."
Mr Brooke has been widely regarded as one of the hardest working ministers and for three years he was simultaneously Conservative Party chairman and Paymaster-General at the Treasury. In his position as Northern Ireland secretary, he was admired on all sides of the Commons for his determination to advance the peace process.
Mr Brooke holds a majority of 4,881 but the seat is still regarded as safe by Central Office. "If we lost it, we would be in never-never land," a Tory source said.
Mr Portillo has made it a pre-condition that any seat he decided to stand in was safe and preferably in central London.
He was apparently put forward by Washington to become the next Nato Secretary-General but is not understood to be in the running for the post. His return to the Commons would be welcomed by many Tory MPs who are still not entirely behind William Hague and would regard Mr Portillo, a leading Euro-sceptic, as the next natural leader of the Conservatives.
In spite of the clear threat that Mr Portillo would present to Mr Hague, he has been in close contact with the Conservative leader over Mr Hague's change of strategy to sharpen the Tories' image.
Mr Portillo has strongly supported Mr Hague's more strident anti-Euro rhetoric in the European elections and advised the Tory leader to rely on his own instincts more than the views of party focus groups.
The former MP was surprised but flattered by the speculation about the Nato job. He has refused to set foot in the Commons since losing his Enfield Southgate seat, and has returned to Westminster only once, for a reception for the Queen in the House of Lords.