Kleiser and George Lucas had known each other as students at the University of Southern California; in 1966, Kleiser had even starred in a short film of Lucas’s called Freiheit. While Kleiser was still in the planning stages for Grease, Lucas was hard at work directing another movie: Star Wars. He shared some rushes—unedited footage from the film shoot, also known as “dailies”—with Kleiser in case Fisher was a good match for the starring role in his high school musical.
According to Vanity Fair, the footage wasn’t really enough to go on. Kleiser couldn’t even get a feel for how well Fisher could act—let alone sing or dance. Why he decided against investigating further remains unclear; maybe he just wasn’t willing to wait until she wrapped Star Wars to schedule her for a more formal audition. Whatever the case, Kleiser and producer Allan Carr moved on to other options, including Deborah Raffin and Susan Dey.
The most promising was Marie Osmond, who was actually offered the role. “They asked me first, and the script was a lot edgier. Sandy was not a nice girl,” she later said on Watch What Happens Live with Andy Cohen. It wasn’t just the character’s rough edges that turned Osmond off. As she explained in another interview, she “didn’t like the fact that the girl had to turn bad to get the guy.”
In fact, the transformation from good girl to bad girl was a big part of the reason Kleiser wasn’t initially keen on casting Newton-John—he was skeptical that she could pull it off. Fortunately, Carr and John Travolta convinced him that she was right for the role.
[h/t Vanity Fair]