She will join a host of glamorous women who represent the label, including Nicole Kidman, who starred in an ad for Chanel No. 5, and Selma Blair, who was signed December to promote the brand's glasses.
Kate Moss has also represented the fashion house as the face of the Coco Mademoiselle fragrance, but she was dumped by Chanel after the cocaine scandal that broke last October.
According to a report in the Mail on Sunday, Knightley is on the verge of signing a three-year deal worth $1m a year.
A source told the newspaper that Knightly was perfect, because she had never been touched by scandal.
"Keira is one of the most beautiful women in the world and becoming the face of Chanel is a dream come true. She will promote the cosmetics and make-up line worldwide," the source said.
Knightley's other sponsor, the upmarket jeweller Asprey, might not be pleased with the star, because she was reported to be wearing an emerald necklace by Bulgari at last night's Oscars ceremony in Los Angeles.
She also neglected Chanel couture, instead opting for a one-shoulder, burgundy-coloured gown by Vera Wang.
Separately, Kate Moss's brief respite from scandal was over this morning as The Sun published a picture it said showed the model with cocaine in a hotel in 1998 and reported that she had snorted the drug at Nelson Mandela's house and that she had been high when she met the former South African leader.
The newspaper outlines 10 years of drug use by Moss, after a model booker and reported member of Moss's "inner sanctum", Gavin Maselle, told his story.
Since the Daily Mirror published a picture of Moss with cocaine in October last year, the model has been through rehab.
The Sun is promising more revelations in tomorrow's newspaper.
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