The former co-stars are in talks of recording the album - which will feature a follow-up to their famous 'Grease!' track 'You're The One That I Want' titled 'I Think You Might Like It' - and plan to give it an "intimate" feel.
John, 58, said: "My desire was to make this Christmas an intimate album, not something too ostentatious or showy.
"I wanted people to be able to play it around the house or in the car during the holidays, and make us part of your celebration."
Olivia, 64, also enjoyed the experience of being back in the studio with her on-screen sweetheart as she feels the pair - who played lovers Sandy and Danny in the hit movie - have bonded since filming together back in 1978.
She added to Australia's NineMSN: "John and I have always connected. That's never gone away.
"When we're together, we have a good laugh and feel bonded to one another. We've been through some amazing experiences together."
The famous duo also have other legendary musicians lined up to feature on the greatly anticipated album, such as Barbra Streisand, Tony Bennett and Kenny G.
Here's a clip from "Grease!" of "You're the One that Want":