During an appearance on "With Kelly" on Thursday, he jokes, "I did hear that rumor, it's a very interesting rumor. I've seen him (Law) in drag and I've seen me in drag - I look like my sister on steroids and he looks beautiful, so I don't want to take that risk!"
The actors have starred together in two films based on the adventures of Arthur Conan Doyle's super-sleuth and they were recently linked to the parts made famous by Tony Curtis and Jack Lemmon in a new version of the 1959 hit.
Reports suggest movie studio executives are keen to revamp the movie, which also starred Marilyn Monroe, and Downey, Jr. and Law were favourites to don drag to play a pair of musicians who dress up as women to join an all-female band.
But Downey, Jr. - who wore a transvestite disguise for a scene in the new Sherlock sequel - has brushed off the claims.