The 38-year-old is attached to play the villain in Warner Bros' DC Comics adaptation, directed by Martin Campbell, says The Hollywood Reporter.
Sarsgaard would portray Dr Hector Hammond, a pathologist and senator's son who obtains psychic powers after discovering a meteor.
Ryan Reynolds was previously cast as Hal Jordan, the test pilot who becomes superhero Green Lantern. Gossip Girl star Blake Lively is to play Jordan's love interest Carol Ferris.
Production on Green Lantern is to start in March in New Orleans.