No, Square Enix isn't working on a Final Fantasy VII remake right now. They apparently have their reasons for ignoring a potential mountain of cash though, starting with this one -- it would be hard to make.
In a recent interview with Ultimania magazine (via Lost Gamer), producer Yoshinori Kitase and Motomu Toriyama noted that part of the reason Final Fantasy XIII lacks towns is that they are difficult to design for high-definition graphics.
"It is a result of considering HD graphics will be the mainstream. Considering the amount of work to make graphics that deserve HD, it is hard to make towns in the conventional style," Toriyama said.
"In the limited period of development time, to convey the the great story that deserves the name of Final Fantasy, and to convey the battles that entertain players enough, we condensed each element."
Kitase added that this same problem applies to any potential Final Fantasy VII remake, "It is very hard to make games on PlayStation 3 in the same style as the games in that era had. Making graphics will take enormous time."
Rumors of a Final Fantasy VII remake started with the famous tech demo above, which was created to show what was possible on the PS3 before it launched. Square Enix has denied such rumors on numerous occasions, but they persist to this day.
At the moment, Square Enix is preparing for the release of Final Fantasy XIII, with FFXIV to follow sometime soon. Once those games are out of the gate, maybe we can start thinking about an FFVII remake.
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