The Wall Street Journal article, citing Egyptian officials and security analysts, comes after a rights group reported Egypt was preparing "a high-security gated and isolated area" to receive Palestinian refugees.
The Journal said Egyptian authorities are constructing an "eight-square-mile walled enclosure" on the Egyptian side of the border with Gaza.
Since the war between Israel and Hamas militants began in early October, Cairo has warned against the "forced displacement" of Palestinians into the Sinai desert.
But with 1.5 million displaced Palestinians pushed up against its border and no results from cease-fire talks, the compound is part of "contingency plans" and could accommodate "more than 100,000 people," the Journal said.
Fears of mass displacement have mounted with Israeli Prime Minister Benjamin Netanyahu's insistence that troops must push into Rafah, Gaza's southernmost point, to achieve "complete victory" over Hamas.
Palestinian leaders, the United Nations, Arab neighbors and Israeli allies including the United States have all warned about the impact on civilians of a Rafah offensive.
The Sinai Foundation for Human Rights, an Egyptian NGO, released a report this week that it said showed construction of the compound to receive Palestinian refugees "in the case of a mass exodus."
AFP reviewed satellite pictures taken on Thursday of the area in northern Sinai, showing machinery building a wall along the Egypt-Gaza border. The area is highly secure and closed to journalists.
A comparison of satellite photos taken on February 10 and February 15 shows land having been graded.
North Sinai Governor Mohamed Shousha has denied that Egypt is preparing "an isolated area in Sinai" to receive refugees.
The Sinai Foundation for Human Rights said it spoke to two local contractors who said construction firms have been commissioned to build the gated area, "surrounded by seven-meter-high walls."
The war was sparked by Hamas's unprecedented October 7 attack on Israel that resulted in the deaths of about 1,160 people, mostly civilians, according to an AFP tally based on official Israeli figures.
At least 28,775 people, mostly women and children, have been killed in Israel's retaliatory military offensive, according to the health ministry in Hamas-run Gaza.
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