Hearst Interactive, the digital media investment arm of Hearst Corp, is incubating a Kindle-like e-book reader, paidContent.org has learned, and the separate venture is called FirstPaper. The stealth startup is based in Palo Alto and New York City. It is developing this device based on Linux and will have some variation of Mozilla browser or its underlying technology (XUL) in it. Some hints about the company’s plans are here and here in the job listings.

Hearst has also invested in E-Ink, the electronic display technology firm, so there might be some synergies involved. E-Ink supplies its technology to Sony (NYSE: SNE) Reader, Sony’s critically acclaimed e-book reader. In fact, Lee Shirani, the former head of Sony Reader’s e-book store, is now working as FirstPaper’s SVP.

A story in Crosscut, a Seattle news site, back in July last year mentioned that Hearst is planning to test-market a wireless online newspaper within the next two years, using E-Ink technology. But unlike Kindle’s small, hardback reader, Hearst plans to employ the technology on a flexible screen almost as big as a tabloid paper. The e-paper can be updated by simply touching the screen. That was quickly denied by Hearst back then, though again, not sure if FirstPaper is related to this. Also not sure if Hearst is the only one funding this company, though the company describes itself as “well-funded”.

E-mails and calls to FirstPaper and Hearst for comment were not returned.