The plan, sent out in draft form to a number of press agencies, would allow banks to park their bad holdings in a separate institution and receive a government-backed bond in return.

"Financial holding companies or credit institutes or subsidiary companies will have the possibility to transfer structured products to special purpose vehicles at a discount to their book-value," the draft said.

According to Finance Minister Peer Steinbrueck the banks will continue to be held responsible for the toxic assets and the costs of the transfer and holding of the assets will be borne by the banks "in the long run."

The plan is being presented to all party groups in the Bundestag on Tuesday and will be debated by Germany's cabinet for approval on Wednesday.

Berlin's bid to rid its banks of these bad debts follows similar plans in other countries, notably Britain, Ireland and the United States.

The issue of how to remove "toxic assets" from banks' balance sheets has become a particularly thorny political topic in Germany, with only five months until the country goes to the polls in a general election.

Plan could solve government's toxic dilemma

Politicians have been torn between the urgent economic need to revive Germany's troubled banking sector and the political desire not to saddle taxpaying voters with a huge bank bailout bill.

The issue is pressing. German banks reportedly have as much as 853 billion euros ($1.2 trillion) of toxic assets on their books that are either worthless or cannot be sold easily in the current difficult market climate.

Weighed down by these soured assets, banks have become reluctant to lend money to consumers and businesses, depressing the German economy, which the government says could contract by 6 percent this year.