The actress, 30, will start production on the project in early 2021 and the film will cover a life-changing weekend in the early 1990s around the Christmas holiday at the Windsor family's Sandringham estate in Norfolk, England, when Diana decided her marriage to Prince Charles was over and she needed to step back from life as a royal family member.
Royal family experts told Fox News that the news of an American star taking on the portrayal of a British icon has garnered mixed reactions.
"Ms. Stewart has a built-in fan base from her 'Twilight' movies, so the producers may be counting on her name recognition to draw viewers. It might be interesting to learn whether she was auditioned for the role against other actresses and was deemed the best fit, or whether she was offered it," said Leslie Carroll, author of "Diana and Charles: Royal Affairs and Notorious Royal Marriages."
"If she can embody Diana's body language and convey her famous breathy, posh Sloane Ranger voice, it won't matter where she was born," Carroll added.
Another author, Tom Quinn, who wrote "Kensington Palace: An Intimate Memoir from Queen Mary to Meghan Markle," explained that while Stewart is a "great actor" who can "manage Diana's mannerisms," U.K. watchers will be critical of a "wrong accent."
And U.K. media correspondent and author of "The A to Z of Harry and Meghan" Neil Sean said that "the news here in the U.K. is simply this... Why? There are many British actresses who would have been better for this role."
"The other real problem with this is the fact that it’s an old story covered countless times so without some great groundbreaking new angle again, what could we possibly learn?" he continued.
Plus, Sean feels that Prince William and Prince Harry will "loathe any kind of exploitation of their late mother's name."
Sean added that "the casting of one of the world’s most famous women in Stewart just shows how out of tune the makers are with what the public’s image and above all love for such a great lady is."
Meanwhile, Larraín defended his casting to Deadline. “Kristen is one of the great actors around today,” he said.
“To do this well, you need something very important in film, which is mystery. Kristen can be many things, and she can be very mysterious and very fragile an ultimately very strong as well, which is what we need. The combination of those elements made me think of her. The way she responded to the script and how she is approaching the character, it’s very beautiful to see. I think she’s going to do something stunning and intriguing at the same time. She is this force of nature," Larraín added.
He explained that the film is about Diana "finding herself, about understanding that possibly the most important thing for her is to be well and to be with herself and by herself."
Fox News' Stephanie Nolasco contributed to this report.