A spokesman for the German finance ministry told a news conference on Monday that the government would cut taxes on diesel fuel used on farms and consider other measures to help troubled farms.
The reduction will apply for two years, Torsten Albig said. He estimated the tax cut would cost the government €525 million in lost revenue.
His comments came after dairy farmers staged a mass protest in the capital by riding on tractors through Berlin's city centre. The demonstrations drew some 6,000 farmers and 200 tractors to the streets leading to the central Victory Column.
"Where is the rescue plan for us farmers?" asked one banner draped across a tractor.
Dairy farmers in Germany have been complaining that the current price of €0.20 per litre of milk is ruinously low, saying they need at least €0.40 to make their businesses profitable.
On Sunday, the vice president of the National Union of Farmers (DBV), Udo Folgert, warned that one-fifth of all dairy farms in Germany were threatened with closure as a result of souring milk prices.
Many farmers across Europe are currently protesting the falling cost of food, and Germany's 90,000 dairy farmers are seen as particularly vulnerable to the price cuts.
Chancellor Angela Merkel can ill afford to lose farmers' support before the September 27 national election, with the Bavarian sister party to her conservatives, the Christian Social Union, particularly reliant on the rural vote.
The Berlin demonstration came as unions said some 12,000 farmers blockaded 81 dairies around France and dairy producers from 10 European countries demonstrated in Brussels against low wholesale milk prices.
Later on Monday, European Union agriculture ministers were to discuss the crisis in the food industry.
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Farmers say that the price they are paid for milk by wholesalers has fallen dramatically in recent months, while the cost to consumers in supermarkets has remained stable.
In May 2008 dairy farmers staged delivery strikes in a similar pricing conflict, pouring milk down drains and threatening national supplies until retailers agreed to raise prices.