It's understood that the service would offer a mix of streaming music to computer and TV for a flat monthly fee, with the ability to buy and save favourite songs free of digital rights management (DRM) restrictions. Songs bought from Sky would play on any MP3 player including Apple's iPod and iPhone.
It's also believed that Sky will bundle the new music service with existing subscription packages for satellite TV, broadband and telephone deals.
It is also hoped that by offering streaming music for a 'small fee' Sky may help combat the illegal downloading of music from file-sharing sites.
Music industry body the IFPI recently suggested that 95 percent of all music downloads were illicit, some 40 billion tracks downloaded illegally worldwide each year.
"Tens of millions of European consumers are engaged in music piracy every day. Whilst government pressure is growing, we also need to deliver alternatives that recognise the needs and desires of the YouTube generation," said Rob Lewis, CEO of Omnifone, an independent unlimited music service provider, and Sky's partner in the service.
Streaming music is nothing new; last week the Swedish music service Spotify opened its music database to UK listeners, with a range of subscription packages available, including an ad-supported free version.
Sky customers can already take advantage of Music Choice, 40 themed satellite radio stations that play music free of presenters or ads. Total Hits, Classical Greats, Freedom, Hip Hop, Revival, Schlager, Cool Jazz and the Greatest Rock Anthems Ever are among the channels Music Choice offer.
Sky previously launched the Sky Gnome, a wireless device connected to your Sky receiver designed to allow you to listen to music around the house. Although popular with some subscribers, the Sky Gnome was dumped by Sky in 2007.
Sky expects to launch the new music service in the spring.
See also: Sky drops £450m Tiscali bid