Without naming sources, the newspaper said Karzai, who is facing reelection this summer, will hold talks with the anti-American hardliner in the coming weeks in a bid to co-opt a main rival and bring his group, Hezb-i-Islami, into the government.
The Sunday Times reported Hezb-i-Islami will be offered several government ministries and provincial governorships in exchange for laying down its arms.
Hezb-i-Islami is regarded by the United States as a terrorist group and has been blamed for many attacks in Afghanistan's eastern and central regions. The newspaper said Hekmatyar's militia was implicated in last year's massacre of 10 French soldiers in Sarobi.
Hekmatyar reportedly will not be offered a government post himself, but instead will be asked to go into exile in Saudi Arabia for three years. The Sunday Times said his name would then be removed from the U.S. government's terrorist list.