Sarsgaard has signed up to play musical legend Monroe, dubbed 'The Father of Bluegrass' for his pioneering of the genre. Gyllenhaal will star opposite as Monroe's lover Bessie Lee Mauldin.
The Oscar-nominated actress told Screen Cave: "Bill Monroe, who invented Blue Grass music, had a kind of Sid and Nancy-style affair with this woman Bessie Lee Mauldin throughout his life.
"T-Bone Burnett's going to do the music and Callie Khouri, who wrote Thelma & Louise, wrote the script so we're going to do that together."
The couple, who married in May 2009 and have a 3-year-old daughter, Ramona, have previously worked together on stage. They are also due to star in the play Three Sisters with Mamie Gummer and Josh Hamilton in New York as part of Gotham's Classic Stage Company's 2011 season.