Billed as an "epic fantasy adventure," the as-yet unnamed film features top actors such as Siddharth Narayan and Shruti Haasan and is due out in January 2011.
K. Raghavendra Rao, who has directed and produced more than 125 films, is producer while the writer-director is Prakash Rao Kovelamudi, who has more than 150 south Indian films to his credit.
Walt Disney India's managing director Mahesh Samat said the project would build the firm's family entertainment brand.
Disney first started operations in India in 2004, as Hollywood began looking to emerging markets such as India, China and Russia to boost growth.
It has also secured a foothold in India's expanding cable and satellite television market through its children's outlets like the Disney Channel and Hungama TV.
In 2008, Disney released "Roadside Romeo", its first, full-length animation feature using local animators and stars from India's Hindi-language film industry Bollywood.
The sector accounted for more than three-quarters of the total Indian film industry revenue and the market is estimated to be worth some 17.3 billion rupees (380 million dollars).
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