Titled 'The Green Destiny', the movie will see actress Michelle Yeoh reprise her role as female warrior Yu Shu Lien, reported BBC online.
Pre-production is believed to have begun. Filming is due to start in Auckland, New Zealand, with two further weeks of shooting in China.
Yuen Woo-ping, who co-ordinated the action scenes in the original, will step behind the camera for the prequel.
Ang Lee-directed 'Crouching Tiger, Hidden Dragon' remains the most successful Chinese-language film of all time, making 127 million pounds on its release in 2000.
Plans for a prequel were delayed by a row over the film rights to Wang Du Lu's novels, on which the film was based.
'The Green Destiny' is based on the fifth book in Wang's series, Silver Vase, Iron Night.
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