The first episode of Xenosaga led me to believe that it might just be a Xenogears prequel. Then Episodes II and III utterly annihilated the possibility of a direct connection due to certain major inconsistencies with Xenogears: Episode I as presented in Perfect Works, Takahashi's vision for the Xenogears series. Since Square Enix still holds the rights to Xenogears (I think?) and Takahashi was working for Monolithsoft, I guess he was prevented from "stealing" the intellectual property he himself left in Square's hands, and used the opportunity to "reboot" his vision. Xenogears is essentially dead -- the intellectual property will not be developed any more in an "official" capacity.
But there is yet hope for Xenogears. Despite being utterly weird story-wise IMHO, Xenosaga Episode III left us with beautiful models of young Lacan, the Zohar, numerous characters, and a bunch of nice-looking mechs, one of which is essentially Weltall from Xenogears. Hm, hm, hm. I can dream at least.