Negotiations between prosecutors and Malvo's attorneys have not been finalized, but Malvo is prepared to testify about the shootings and his relationship with Muhammad, the source said.
The source, who confirmed the report by WTOP radio in Washington, requested anonymity because the deal was not complete.
Attempts to reach Malvo's attorneys Tuesday were not immediately successfully. Deputy State's Attorney Katherine Winfree, who is prosecuting Muhammad, would not comment.
Jury selection began Monday in Montgomery County Circuit Court in the case against Muhammad, 45, who is charged with six counts of homicide in the 2002 sniper shooting spree that left 10 people killed and three people wounded.
Under the terms being considered, the source said Malvo would plead guilty in connection with the six shooting deaths in Montgomery County, where the spree began and ended.
He would be sentenced to life in prison, the maximum sentence for a homicide committed by a juvenile. Malvo, now 21, was 17 at the time of the shootings and is already serving a life sentence in Virginia.
If Malvo accepts the agreement, it would mark the first time he testifies against his fellow defendant. Malvo appeared briefly at a pretrial hearing before Muhammad's Virginia trial, but didn't testify.
J. Wyndal Gordon, one of Muhammad's three standby attorneys, said he's not surprised to hear negotiations were in progress since Malvo has been listed as a potential witness by both the prosecution and the defense. Gordon said Malvo would have credibility problems.
"He's not going to be the star witness for the prosecution," Gordon said.
Muhammad has been sentenced to death in Virginia for one of the killings.