The ailing actor will receive the Icon Award at a tribute on 13 January (11) as part of the festival's Talking Pictures: The Contenders series, which focuses on Oscar front-runners.
Festival organisers say the prize "honours a creative talent who, through the course of his career, has created a body of work which symbolises the highest level of achievement in the motion picture art form."
Douglas, who revealed earlier this year (10) that he is being treated for throat cancer, is nominated for a Golden Globe for his role in this year's (10) Wall Street: Money Never Sleeps.
Festival director Darryl MacDonald says, "We're thrilled to have the opportunity to honour Michael Douglas at a time when both his creative prowess and his contributions to world cinema have never been more evident - or more deserving of celebration. Simply put, he's an American treasure."
The 22nd annual Palm Springs International Film Festival begins on 6 January (11).