The Barfi! actress will be taking on the lead role in the upcoming Ali Abbas Zafar project.
A source told The Times of India: "News of PC bagging the film right under her nose is not true. Katrina loved the script of Gunday, but she had given her dates for the Hindi remake of the Hollywood film Knight and Day with Hrithik Roshan already. And that's why she couldn't do the film.
"She wanted to be part of the film. Kat has worked with Ali in Mere Brother Ki Dulhan and the two get along very well. She is also a close friend of Arjun [Kapoor], who's in the film.
"Even though she let go of the film, she hangs out with Ali Abbas and the gang. News of Priyanka being the first choice is not true."
A spokesman from production house Yash Raj said earlier this week that Chopra was better suited to the "challenging" role.
It was reported recently that Kaif is still not on speaking terms with former boyfriend Salman Khan's ex, Aishwarya Rai Bachchan.
Watch Priyanka Chopra in the trailer for Barfi! below: