Source:
http://www.engadget.com/2011/03/31/google-working-on-a-face-recognition-app-that-leads-to-your-pers/

in fact they are mentioning
http://edition.cnn.com/2011/TECH/mobile/03/31/google.face/index.html

I read at I think it was Spiegel that Google Press rejected this story...

Google rejected the story... but the journalist made his article WITH google, they have an audio record of the interview.