The Hollywood Reporter said James will play the role in flashbacks explaining how the relationships at the heart of the story were formed.
Ol Parker wrote and will direct Mamma Mia: Here We Go Again!, which is set for release on July 20, 2018, Deadline.com noted.
The original movie's stars, including Streep, Pierce Brosnan, Amanda Seyfried, Christine Baranski and Colin Firth, have signed on to return. The soundtrack will once again be packed with hit songs by the Swedish pop group ABBA.
The first movie was about the three ex-boyfriends and two lifelong girlfriends who arrive on a Greek island for the wedding of Donna's 20-year-old daughter, Sophie, who is dying to know who her father is.
James, 28, is known for her work in the films Darkest Hour, Baby Driver, Pride and Prejudice and Zombies and Cinderella, as well as on the TV show, Downton Abbey.