Justice Minister Heiko Maas, said in a statement that he and Interior Minister Thomas de Maizière had struck a deal on a draft law which would create a path to dual citizenship for thousands more people.
Maas called the plan "a very significant step toward a modern citizenship policy."
Those over the age of 21 who were born in Germany and have lived in the country for at least eight years or attended school here for at least six years - without being born here - will no longer have to choose between their birth country and their parents' country of origin.
Exceptions will also be made for those who have spent fewer than six years but graduated from a German school, or completed a vocational programme.
The current rules state that children must choose by the age of 23 between taking a German passport or that of their parents' country of origin. The policy affects about 30,000 people a year.
European Union citizens are already permitted to hold both German citizenship and that of their country of origin.
Allowing dual nationality was a key demand of the Social Democrats (SPD) during negotiations with Chancellor Angela Merkel's conservatives that resulted in a hard-fought deal in November on teaming up in a left-right government.
But representatives of Germany's three-million-strong Turkish community have expressed disappointment that the deal does nothing for those born abroad even if they have long resided in Germany.
They have said they would like to see everyone of foreign origin have the option of keeping more than one nationality.
President of the Turkish Community in Germany, Kenan Kolat, said in an open letter that “legal insecurity and inequality remain”.
“Those affected will have to go through a complicated process in the future that threatens them with the loss or withdrawal of German citizenship," he wrote.
He added that thousands of Turks would still have to choose between German and Turkish citizenship which threatened the integration process and “contradicted” Germany’s image of a “modern immigrant society”.
The draft law is to be presented to the cabinet for approval "as soon as possible," Maas said, so the legislation can pass parliament this year.