The device could use Willow Glass, a new type of flexible glass, allowing it to have a curved touchscreeen, The New York Times said, citing "people familiar with the company’s explorations".
An Apple watch could be used to make mobile payments, for navigation, to access messages from the wearer's phone or to monitor health and activity, the newspaper speculated. It would run iOS, the same mobile operating system as the iPhone and iPad, The New York Times said.
Separately, The Wall Street Journal reported that Foxconn, Apple's main manufacturing contractor, has discussed technologies that could address some of the technical challenges of such a device. In particular it has concentrated on making more efficient displays and chips, which could allow a smart watch to run for longer without recharging.
The reports will fuel rumours that emerged from China late last year. Local technology blogs claimed Apple was building ”a device using Intel chips and new low-power Bluetooth technology. A 1.5-inch touchscreen or Apple's voice assistant Siri would be used to control the phone, they said.
It would mark a major foray into the emerging market for wearable computing for Apple, which is seeking new product categories to continue its rapid growth in recent years and replace dwindling iPod revenues.
“We believe technology could progress to a point where consumers have a tablet plus wearable computers, like watches or glasses, that enable simple things like voice calls, texting, quick searches, navigation,” said Gene Munster, an analyst at Piper Jaffray, last month.
Apple already makes money from wearable computing thanks to third party accessories. Device's such as Nike's FuelBand and Jawbone Up are worn on the wrist and transmit data on daily activity to the iPhone via Bluetooth. Tim Cook, Apple's chief executive, has been seen sporting a FuelBand recently.
As the Apple rumour mill gears up, Google has meanwhile already confirmed it plans to get into the wearable computing market. Google Glass, its augmented reality spectacles, are already in public testing.