The source at Australian architects Woods Bagot, which was recently awarded a contract for the project, said the tower is to be located on the Arabian Canal, a $61 billion project being developed by Limitless.
Both Limitless and Nakheel are part of state-owned conglomerate Dubai World.
The source would not reveal the name of the project, which is commonly referred to as Al Burj or the Tall Tower.
Nakheel confirmed to ArabianBusiness.com that it was working with Woods Bagot, but said it could not discuss details about the project.
"We are still finalising the design concept of a new project involving an iconic structure - Woods Bagot are a consultant on this project," Nakheel said in a statement.
"As we are still in the design concept stage, it would be premature to discuss any details at this early stage."
At 1,200 metres high Al Burj would be significantly taller than Emaar Properties' Burj Dubai, which is expected to be up to 900 metres once complete in early 2009, although the final height remains a closely guarded secret.
Speculation over whether Nakheel would trump rival Emaar in the race to build the world's tallest tower has been rife ever since the developer announced the Al Burj project back in 2006.
The tower was initially planned to be over a kilometre high and form part of Nakheel's Dubai Waterfront development, but the location was changed.
The tower is now expected to be built between Jumeirah Lake Towers and Ibn Battuta Mall close to Sheikh Zayed Road, according to Construction Week.
The magazine revealed in January that French company Soletanche Bachy had begun piling work on the project.
Nakheel told ArabianBusiness.com the location had yet to be finalised.
"The location of the project has not yet been confirmed, as we are currently conducting test piling to ascertain the suitability of a potential site,” the developer said.
The project is expected to be officially launched "sometime toward the end of the first half of this year", a company spokesperson told ArabianBusiness.com in January.
The Arabian Canal project will include a 75-kilometre canal and extensive waterfront development stretching inland from Dubai Waterfront in Jebel Ali, passing to the east of the Dubai World Central development before turning back towards the Palm Jumeirah.
Limitless is spending around $11 billion to build the canal alone, and another $50 billion on a sprawling 20,000-hectare development that will stretch for 33 kilometres along the inland section of the waterway.