The search giant is set to use its Android software to power the gadget.
It will battle against Apple's iWatch and a Samsung gadget the Korean giant revealed this week it is developing.
According to the FT, the watch is being built by Google's Android team, which usually works on handsets and tablets, rather than the 'X Lab' which is developing the Google Glass Wearable Computer and the driverless car.
The paper claims 'to a person briefed on the project' said it will act as an extension to a user's mobile phone, showing emails and other alerts.
A Google patent application for a wearable computer filed in 2011 and approved last year lends credence to the rumours.
The filing describes a 'smart watch' with a dual-screened 'flip-up display', 'tactile user interface' and onboard camera.
Google's patents for a smartwatch show a traditional looking screen with a 'flip-up' second display which can show directions or private messages
'A smart-watch can include a wristband, a base, and a flip up portion,' the patent filing says.
'The base can be coupled to the wristband and include a housing, a processor, a wireless transceiver, and a tactile user interface.
'The tactile user interface can be configured to provide interaction between a user and the smart-watch.'
The filings show a flip screen being used to show directions and to make purchases simply being pointed at a price tag.
A 2009 concept of a Samsung smart watch: The firm's mobile boss today confirmed it is working on a watch
Apple is also believed to have 100 people working on a watch, accoridng to recent rumours. Here is MacUser magazine's mockup of what it could look like
Samsung last week confirmed it is developing a watch.
'We’ve been preparing the watch product for so long,' Lee Young Hee, executive vice president of Samsung’s mobile business, told Bloomberg during an interview in Seoul.
'We are working very hard to get ready for it.
'We are preparing products for the future, and the watch is definitely one of them.
'The issue here is who will first commercialize it so consumers can use it meaningfully,'
An earlier concept developed by by designer Joseph Loetiko shows a watch than can be removed from its wristband when running or to answer a call, for example.
Samsung's watch concept shows a solid wooden band, and the watch face can be simply slipped out and put in a pocket when running, for example
The global watch industry is expected to generate more than $60 billion in sales this year, and rather like the mobile phone market, firms are expected to try and 'lock' consumers into their own ecosystem of apps and other downloads.
'The race is on to redesign the mobile phone into something that you wear,' said Marshal Cohen, an analyst at NPD Group in Port Washington, New York.
'We’re going to see formidable competition coming from many different directions -- from device makers, accessory makers, even fashion designers.'
Samsung became the world’s largest smartphone maker last year, overtaking Apple. Samsung had 29 percent of global smartphone unit shipments in the fourth quarter, compared with 21 percent for Apple.
Experts believe the new watches could kickstart the mobile phone market, in the same way that the tablet market exploded when Apple introduced the iPad.
Samsung's watch concept can even be taken out of its strap to answer a call
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