Japanese news agency Kyodo was reportedly told by Hitachi that the ECB has started talks with the company about the use of its radio chip in the banknote.
The ECB is deeply concerned about counterfeiting and money-laundering and is said to be looking at radio-tag technology.
Last year, Greek authorities were confronted with 2,411 counterfeiting cases and seized 4,776 counterfeit banknotes, while authorities in Poland nabbed a gang suspected of making more than a million fake euros and putting them into circulation.
To add to the problem, businesses also find it hard to judge a note's authenticity, as current equipment cannot tell between bogus currency and old notes with worn-out security marks. Among the security features in the current euro are threads visible under ultraviolet light.
"The main objective is to determine the authenticity of money and to stop counterfeits," Frost and Sullivan analyst Prianka Chopra said in a report published in March.
"RFID (radio frequency identification) tags also have the ability of recording information such as details of the transactions the paper note has been involved in. It would, therefore, also prevent money-laundering, make it possible to track illegal transactions and even prevent kidnappers demanding unmarked bills," Chopra said.
tags are microchips half the size of a grain of sand. They listen for a radio query and respond by transmitting their unique ID code. Most RFID tags have no batteries: They use the power from the initial radio signal to transmit their response.
Besides acting as a digital watermark, the use of radio chips could speed up routine bank processes such as counting. With such tags, a stack of notes can be passed through a reader and the sum added in a split second, similar to how inventory is tracked in an RFID-based system.
The euro came into circulation on Jan.1 last year, with 12 countries adopting it as standard currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
If the ECB-Hitachi deal comes about, the project could involve the use of tiny radio tags, a feat that Hitachi claims to have already achieved.
In February, the Japanese firm said it had successfully operated the world's smallest noncontact chip, which measured only one-third of a millimeter across.
Hitachi said its "mu-chip" is capable of wirelessly transmitting a 128-bit number when radio signals are beamed at it.
In a euro note, the number could contain a serial code, as well as details such as place of origin and denomination.
Data can only be written on the chip's ROM during production, and not after it is out "in the wild," according to Hitachi.
The minuscule chip has been selected for use in admission tickets for Japan's international expo, which will be held in the country's Aichi Prefecture in 2005.
CNETAsia's Winston Chai reported from Singapore.