A plea deal would spare President Barack Obama from presiding as military commander in chief over the first US war crimes tribunal to prosecute someone for acts allegedly committed as a minor.
Now 23, Khadr was 15 years old when captured and has spent a third of his life locked up at Guantanamo. He is accused of throwing a grenade that killed a US special forces soldier during a firefight at a suspected Al-Qaeda compound near the Afghan city of Khost in July 2002.
Defense lawyer Barry Coburn said on Tuesday evening that plea discussions were ongoing with prosecutors.
"As of right now there is no deal. We are always open to discussion and we're hopeful of reaching a resolution," Coburn told reporters at Guantanamo.
Khadr could be jailed for life if convicted on all five charges, which include murder and conspiring with Al-Qaeda.
The Toronto Star newspaper said Khadr had rejected an offer that would have limited his sentence to five more years in custody at Guantanamo or a US prison, citing unidentified sources.
Toronto-born Khadr is accused of murdering US Army Sergeant 1st Class Christopher Speer with a hand grenade during the battle in Afghanistan and making roadside bombs for use against US forces.
He is the youngest captive among the 183 held in the detention camp at Guantanamo, and the only one from a Western nation.
At a hearing scheduled to begin on Wednesday at the remote Guantanamo Bay naval base in eastern Cuba, a US military judge will decide whether Khadr's alleged confessions to interrogators can be used as evidence against him at his trial in July.
Defense lawyers say that during at least 142 interrogations in Afghanistan and Guantanamo, Khadr was beaten, doused in freezing water, spat on, chained in painful positions, forced to urinate on himself, terrorized by barking dogs, subjected to flashing lights and sleep deprivation and threatened with rape.
Prosecutors contend Khadr was treated humanely and has fabricated the abuse allegations.
Obama signed a new law in October 2009 that prohibits the use of evidence obtained through coercion and makes it harder to use hearsay evidence in the Guantanamo tribunals.
But the Pentagon rule manual implementing the changes was only completed and signed by Defense Secretary Robert Gates on Tuesday night. Because of that, the judge at Guantanamo delayed the start of Wednesday's hearing until the afternoon to give lawyers time to review the changes, Khadr's military lawyer said.
