The Seattle-based bookseller, which has already sold more than 5 million Kindle Fires that compete with the Apple iPad and other tablets, is working with Hon Hai Precision Industries (Taipei: 2317), whose Foxconn unit would build the phones.
Amazon CEO Jeff Bezos, 45, who has an electrical engineering degree from Princeton, has designed some elements of smartphones; last year he received a patent for one that would deploy an airbag if a smartphone is dropped.
Representatives of Amazon declined comment.
Already the world's biggest bookseller and e-retailer, the company has a huge treasury to fund product development: it reported cash and investments exceeding $5.71 billion in the first quarter.
Bezos, who said at last October's Kindle Fire introduction that he'd spend what it takes to get into the tablet business - and owns just under 20 percent of the company - can do what he wants.
Having succeeded with the simple Kindle e-reader, Bezos's Kindle Fire has proved popular and allowed Amazon to compete with Apple in the tablet sector, which is expected to sell as many as 126 million units this year, estimates IHS iSuppli (NYSE: IHS), an 85 percent gain.
So extending the Kindle brand to a smartphone would be a brand extension for Amazon, affording Bezos more platforms to sell content. An Amazon phone would likely use the Android OS from Google (Nasdaq: GOOG), the No. 1 search engine, much like the Kindle Fire.
Besides dreaming up a phone, Bezos would also need to create relationships with the principal wireless carriers headed by AT&T Inc. (NYSE: T), the No. 1 telecommunications carrier and the Verizon Wireless unit of Verizon Communications (NYSE: VZ), the No. 2 U.S. carrier.
At the same time, by forging ties with the telecommunications companies for the Amazon Kindle phone, the company Amazon would now empower the Kindle Fire to be more like the iPad, because it would interact with the wireless grid.
Alternatively, Amazon, which has built a network of huge computer centers that provide services to clients such as Netflix (Nasdaq: NFLX), could try to operate its own telecommunications network but would likely require approval from the Federal Communicatioons Commission and state regulators.
Amazon, of course, could sell the phones itself as well as make them available through its own retail network.
Amazon shares fell $2.01 to $225.05 in Friday trading. They've gained 30 percent this year. Apple shares fell $4.06 to $605.88. They've gained nearly 50 percent in 2012.