I'll probably wait until Square does an official announcement, but if it's true, then I'll be a sad panda. The CGI and in-game graphics for it were just so damn awesome.
And perhaps someone could correct me, but weren't a lot of the things for this game "done" so to speak? I mean, weren't they in the Voice Acting stage like a year ago because most if not all of the story was done? And they had a combat system that it seemed solid and set in stone too.
Granted I don't know how much of that was truth and not just simple lies, but it would be a shame to see it go. Unless they made it have a different title like they did with Agito XIII becoming Type-0, though I don't think that would be the case.
It would be really messed up for the people who worked on it for the past...however long they were actually working on it, to just stop. On a slightly more positive note if this is true, is that KH3 would probably be on its way to being made (not that I don't appreciate Days, BBS, and 3D. Not to mention the constant wave of KH games for the past 5 years or so).
Guess we'll see. Just a rumor right now afterall.