James plays the younger version of Streep’s character Donna in the musical, due for release next week.
The 29-year-old will be best known to fans for her work in Downton Abbey, the live-action Cinderella, and last year’s critically acclaimed Baby Driver.
In the new musical, she takes the lion’s share of the singing – as revealed by the soundtrack, out today.
“I had no idea Lily James had the singing chops,” Streep said.
“Some people sing from the bottom of their feet, right up. She shakes the rafters, she’s amazing.”
James said: “When I found out I would be part of the sequel, i was terrified and very excited.
“Donna is a character so beloved and Meryl Streep is the best actress of all time.”
“Lily has a great energy,” Streep beamed. “And her spirit is what young Donna was.
“She’s just perfect.”
Streep has not been seen much in any trailers for the sequel, prompting speculation that Donna could have died.
Although the megastar does have appearances on the soundtrack, many have assumed that she will be seen in ghost-like spiritual form.
“I really never thought that there would be a sequel,” she admitted. “When this script came, it took my breath away.”
She added: “Walking onto the set and seeing Colin [Firth] and Stellan [Skarsgard] and Pierce [Brosnan] and Christine Baranski and Julie Walters and Dominic [Cooper] and Amanda [Seyfried]…
“The music starts up and you put on the spandex and honey, it all comes together.”
Mamma Mia: Here We Go Again is out on July 20.