The panel including five African heads of state is meeting in Mauritania's capital, Nouakchott. It is expected to review and approve suggestions from mediators who have met with representatives of Ivory Coast's two rival presidents.
The AU named the panel to settle the crisis that developed after both men claimed victory in the November presidential election and formed their own governments.
The AU says any decision the panel makes will be legally binding. However, the AU has no obvious mechanism for enforcing any ruling, and the Gbagbo government has said it will only accept the AU's decision if it respects the Ivorian constitution.
Ivory Coast's constitutional council named Mr. Gbagbo the winner of the election, overturning results that showed Mr. Ouattara as the victor.
The AU, the United Nations, and the west African regional bloc ECOWAS have all said they recognize Mr. Ouattara as the winner.
Participants at the meeting in Nouakchott include the leaders of Burkina Faso, Chad, Mauritania, South Africa and Tanzania. AU Commission Chairman Jean Ping and a top U.N. official, Said Djinnit, are also taking part.
The United Nations says post-election violence in Ivory Coast has killed nearly 300 people. Tens of thousands of refugees have fled to neighboring Liberia to escape the violence and uncertainty.
Tensions rose further last week as several international banks shut down their branches in Ivory Coast. The country's banking system has been paralyzed due to international efforts to financially strangle the Gbagbo government. The crisis prompted a run on banks as ordinary Ivorians tried to get hold of their cash.
Mr. Gbagbo retains control of state institutions including the army. Mr. Ouattara has spent more than two months in an Abidjan hotel, protected by U.N. peacekeepers.