NEW YORK (CNN/Money) - The Justice Department rejected a request from Martha Stewart to discuss insider trading allegations, according to a published report.

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The Financial Times, citing people close to the investigation, reported that Stewart's lawyers were waiting to hear from the Justice Department in Washington before settling on a plea agreement with federal prosecutors in New York.

The U.S. Attorney's office in Manhattan began investigating Stewart in December 2001 after she sold $225,000 in ImClone (IMCLE: Research, Estimates) stock a day before the Food and Drug Administration announced that it would not review the application for the biotech's cancer drug, Erbitux.

People familiar with the negotiations also told the paper that the government is slowly backing away from insider trading charges and may instead charge her with the lesser offense of obstructing an investigation.

Such charges still carry prison time and would prevent the domestic diva from serving as an officer of any publicly held company, including Martha Stewart Living Omnimedia (MSO: Research, Estimates).

The Securities and Exchange Commission has the option to proceed with its own lawsuit against Stewart should the U.S. attorney choose not to bring criminal charges against her.

Stewart has maintained her innocence throughout the investigation. ImClone founder Sam Waksal, a friend of Stewart, agreed to pay more than $800,000 in fines for his role in the scandal. He will be sentenced on June 10 for criminal charges stemming from the investigation.