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A mod on gaf that usually has an ear pretty low to the ground when it comes to Final Fantasy or Square Enix says she was told quite recently that development is full steam ahead:

http://www.neogaf.com/forum/showpost.php?p=40064380&postcount=27

I personally hope it's not canceled. Everything we've heard about this game sounds awesome. Giant (seamless?) world + map, battles in and out of cities, flashy action-based combat. Then there was that gameplay video.

It looked like they had laid the groundwork for the best JRPG of all time, provided they didn't really screw up the story or pacing.