Prime minister Gordon Brown is expected to sign off plans to introduce a £2000 old-car scrappage incentive within the next few days.
The scheme, which is tipped to give owners of cars nine or more years old £2000 to upgrade to a new, cleaner vehicle, is then expected to be announced in the budget on 22 April.
The plans are designed to boost demand for new cars and help struggling carmakers who are suffering during the recession.
However, they have also proved controversial, with chancellor of the exchequer Alistair Darling and business secretary Peter Mandelson reportedly at loggerheads over whether the scheme should be introduced.
Darling is reportedly concerned at spending £160 million on the scheme at a time when the government's finances are being stretched by a series of other economic stimulus packages. He is also worried about supporting one struggling industry over another, and that many of the new cars that will be bought will not have been built in Britain.
However, Mandelson has pledged to help the car industry, and believes the benefits to the entire car supply chain make the investment worthwhile.
Brown is reported by the BBC to now side with Mandelson, having been concerned by a year-on-year sales drop of new cars of nearly 30 per cent in March, and job losses, plant closures and pay cuts at Nissan, Jaguar, Land Rover, Mini, Honda and Toyota.
"Our position on this is that we continue to look at the possibilities of such a scheme but no decision has been taken," Brown's spokesman said today.
However, it is not clear how the deal will be funded. Reports suggest Darling wants the car makers to provide half of the incentive, with the government providing the rest of the money.
Brown must also convince green activists, who are also opposed to the idea.
"This scheme won't create jobs and it won't help the environment. All that you're going to get is a switch to more polluting, bigger vehicles. And that's not going to help anyone," Peter Cranie of the Green Party told the BBC.