A spokesperson for the German firm has confirmed that they are very interested in opening a store at the Severnside town.
While they have not yet identified a suitable site, surveyors working on behalf of the supermarket are believed to have visited a number of potential sites in the town.
District Councillor James Bevan says a Lidl store in Lydney would be great for local residents and would be healthy competition for stores such as Tesco and Co-op.
He said: “I’ve been told they are interested in the Watts site on Newerne Street.
“It would be good for the town. We need a budget supermarket in Lydney.”
Another potential site could be the former Tuffins store on Hams Road and planning permission was granted for a supermarket on land South of Cambourne Place.
County Councillor Alan Preest, says he’s ‘over the moon’ with the prospect of Lidl coming to Lydney.
He said: “If it turns out to be the former Tuffins site, I’m 110 per cent behind the scheme.
“With these extra 1,900 homes being built in Lydney retail growth is just what we need.
“Lidl is a great store and it’s just the type of supermarket we need in the town."
A Lidl spokesperson said: “Lydney is very much an area of interest to us, however we have not yet identified a suitable site.”