The 47-year-old "Spinning Around" hitmaker has met with Dannii, 43, for secret recording sessions last month when she was in the UK for her live shows at London, reported Daily Mirror.
The sisters were said to be recording cover Wham!'s "Last Christmas", but have not yet decided which song they will use.
"Minogue fans have long wanted a duet between the two sisters, but Kylie never felt it was the right time. Also, her management tried to avoid it because they considered the pair were in different leagues," a source said.