The 70-year-old boxing hero has allegedly been lined up to lead a parade of sporting legends.
David Beckham and long-distance runner Haile Gebrselassie will also be among the parade, reports The Mirror.
Ali was reportedly asked "several months ago" to appear at the event.
"The idea is to get a parade of stars for the opening ceremony, and Ali would undoubtedly be the greatest star of all," a source told the paper.
"There is a question mark over him purely because of his health. He is frail, but would love to be involved. He has great affection for Britain.
[L: David Beckham, R: Michael Phelps - both of whom are also tipped to join the rumoured parade of sporting legends]
"It would bring back memories of Ali lighting the Olympic flame at the 1996 Games in Atlanta, one of the great Olympic moments. But it would also give us the chance to get the greatest Olympians of all time involved."
Michael Jordan, Sir Steve Redgrave, gymnasts Larisa Latynina, Nadia Comaneci and Olga Korbut and swimmers Mark Spitz and Michael Phelps are also tipped to appear.
Details surrounding the performers for the Olympic ceremonies have been kept secret, with people who watched a rehearsal last night being urged to 'save the surprise' by not leaking any spoilers.
Watch Muhammad Ali lighting the Olympic cauldron at the Atlanta 1996 opening ceremony below: