AT&T executives were considering a takeover in Europe, and some believed an opening existed now to buy a carrier in a major European market such as Britain, Germany or the Netherlands, the paper added.
KPN shares, of which 28 percent is owned by Mexican billionaire Carlos Slim's America Movil, reacted positively and were up 3.8 percent at 4.40 euros, rising to a five-week high and outperforming the STOXX 600 Europe Telecoms index.
Europe's fragmented telecoms market is dominated by national players which mostly operate local networks, offering economies of scale after consolidation.
A deal, if one happened, could come before the end of the year, the WSJ said.
An AT&T spokesman in Europe declined to comment, saying the company has a policy of not commenting on rumour and speculation. KPN declined to comment.
Big telecom companies such as AT&T could benefit from buying European rivals and create economies of scale, similar to the international expansion strategy of British carrier Vodafone, said analyst Jos Versteeg of Dutch private bank Theodoor Gilissen.
"Slim owns almost 30 percent. I don't see him selling now. He is a long-term investor. AT&T doesn't stand a chance buying KPN," Versteeg said.
Indebted Spanish telecoms firm Telefonica listed a minority of its German subsidiary Telefonica Deutschland in October to help reduce debt.
Versteeg did not know whether Everything Everywhere (EE), which is owned by France Telecom and Deutsche Telekom, was a likely acquisition target.
Robin Bienenstock, analyst at Bernstein said AT&T and America Movil had tried to bid together for Telecom Italia in the past but she saw little chance of AT&T making a takeover in Europe.
"Whilst it's possible I think it's probably only at the early exploratory stages, and were AT&T to do reasonable due diligence, it seems unlikely such a deal would go through," she said.