Walcott's current contract runs out in the summer, and the club have been in negotiations to close out terms on an extension which would make Walcott among the highest-paid players at the club with a five-year contract worth around £90,000 a week, boosted by lucrative add-ons.
The 23-year-old has excelled in his preferred central striker's role, netting a hat-trick in the 7-3 win over Newcastle which made him Arsenal's top scorer with 14. Wenger said: "One credit I always gave him was that I could never see a difference in training or in games, during a period that was quite difficult for him."
He added: "I don't think it is affecting him. When he played against Newcastle, and scored three goals, he was completely committed. Everybody reacts in a different way.
"Sometimes people have personal problems, they cannot play football. Sometimes they play even better in the game because it is a moment to forget their personal problems. I always thought Theo would react well. It is in a player's interest to play (well) anyway. I expected him to behave properly."
While not taking anything for granted, Wenger hopes a positive end to the saga can be reached in the coming weeks.
"We are on a good road. In this situation as long as nothing is signed, you are cautious, but I am optimistic we will get to a happy conclusion," he said. "I was optimistic last week, but I am a bit more optimistic this week. Discussions progress smoothly, but slowly."
With France international Olivier Giroud struggling to shake off a knee injury suffered in the FA Cup draw at Swansea, Walcott could again be leading the attack against Manchester City tomorrow.
Midfielder Abou Diaby could be included in the squad after three months out with a thigh problem, provided he shows no reaction to playing for the under-21s in midweek.
"Let's touch wood that he will get stability without injury," said Wenger. "Diaby can't be at the top today, but for us it is very important that he comes back and plays until the end of the season, because that would be like a new signing for us."
- Sports & Recreation