The untitled computer-animated film is in pre-production at Lucas' Skywalker Ranch production facility in Marin County, California, according to the Hollywood Reporter.
The musical marks a rare step outside the Star Wars universe for the filmmaker, who last directed Star Wars: Episode III - Revenge of the Sith in 2005.
Elf writer David Berenbaum wrote the screenplay, which is tightly under wraps but is rumoured to feature fairies.
Teenage Mutant Ninja Turtles' Kevin Munroe is directing the project, which is expected to feature songs from a variety of sources.
A Lucasfilm spokesperson says it is "too early to comment on the details of the project".