Kirk Douglas: Last starred in Diamonds in 1999
The movie, due to begin filming in February, will be a comedy called Smack in the Puss, said trade newspaper Variety.
Australian Fred Schepisi is said to be negotiating to direct and Michael Douglas's 23-year-old son Cameron is also likely to participate.
Talking about the project, Michael Douglas, 57, said: "It's a black comedy about three generations of a dysfunctional family living in New York, and their attempt to reconcile."
Oscar-winning Michael Douglas is said to have wanted to work with his 84-year-old father for many years.
But it was a combination of a favourably considered script and the effect of the terror attacks of 11 September that finally got the ball rolling.
Michael Douglas explained: "A lot of this came out of 11 September, which has made everyone question their life priorities.
"If you have a rare opportunity to work with people you know on an appropriate project, you take it.
"I realised this offered the perfect chance to finally do a picture with my father. Dad and I could never decide on one to do together before."
Acclaim
Kirk Douglas, who suffered a stroke in 1995, last appeared in the 1999 comedy Diamonds.
But, with almost 100 films under his belt, Douglas was one of the biggest screen stars of 50s, 60s and 70s.
Michael Douglas, who is currently starring in Don't Say A Word, followed his father's acting footsteps, first becoming a TV star.
He made his name in the hit cop series The Streets of San Francisco in the 70s.
He moved into film almost full-time at the end of the decade and has since won acclaim for movies such as Wall Street, War of the Roses, Fatal Attraction and Black Rain.