Watts plays the late British royal in upcoming movie Diana, which focuses on the last two years of the Princess' life before she died in a car crash in Paris, France in 1997.
Blunt, who was rumoured to have turned down the Diana role, is now said to be in talks to play the royal in another project, based on the memoirs of Diana's former bodyguard Ken Wharfe.
The movie adaptation of Diana: Closely Guarded Secret is being developed by producer Stephen Evans, the brains behind 1994 royal drama The Madness of King George.
If Blunt signs on, it could reunite her with her Salmon Fishing in the Yemen co-star Ewan MCGregor, who is tipped for the role of Wharfe.
An insider tells Britain's Daily Mail newspaper, "I know Emily has read the script and she has said she likes it."