Deadline claims that the Real Steel director is due to helm the fantasy adaptation, from a script by screenwriter Michael Vukadinovich.
The Three Misfortunes of Gepetto will follow the life and loves of Pinocchio's eventual creator as he risks adventure and war to be with his true love Julia Moon.
Levy has also been linked to several other Fox projects, including a new adaptation of Mary Shelley's Frankenstein and Isaac Asimov's adaptation of Fantastic Voyage.
The director's latest film Real Steel was released last weekend and topped the US box office.
> Shawn Levy interview: 'Real Steel robot fights are f**king gnarly'
Watch the trailer for Real Steel below: