Is Lionhead working on Fable III? In some capacity, almost definitely. Considering the success of Fable II, not developing a third game in the series would be throwing money away. But we didn't expect this kind of Fable III "confirmation."
So who's mentioning Fable III now? The New York Times, which is typically not wrong about much. More specifically, the Times "Weddings/Celebrations" section is talking about the next Fable game. Yes, Fable III is being mentioned alongside the announcement of Lionhead designer Joshua Atkins' weekend wedding. PR is so weird!
This nuptial news source isn't the first time Fable III has been rumored to be underway, as British TV personality Jonathon Ross indicated his voice over involvement in the third chapter. Peter Molyneux has hinted at what's to come in future Fable games, citing the "See The Future" expansion as "a flavor at what's going to be happening" in the next episode.