Separately, the cabinet also granted sweeping new powers to federal police for online searches of computers to prevent terror attacks and other serious crimes, in a second measure that has raised hackles among civil libertarians.
The measure agreed in March with Washington eliminates much of the red tape investigators now face when requesting information on terror suspects. If the person in question is found in the other country's records, authorities can request fingerprints and personal information.
But the draft law sets higher hurdles for supplying certain information such as the suspect's membership of a trade union or their sexual orientation, stipulating that such facts could only be provided when they are "particularly relevant" to an investigation.
Privacy rights activists, opposition parties and Social Democrats insisted on clauses that would head off potential abuse such as requiring data that is no longer needed to be wiped from the records and establishing rules for correcting false data.
The bill, which still needs parliamentary approval, comes nine months after German authorities uncovered a plot to attack US interests and citizens in Germany, including US military installations, after US intelligence passed on information to Berlin.
Three men captured in September - two German converts to Islam and a Turk - had attended training camps in Pakistan and were stockpiling chemicals to make car bombs, prosecutors said.
US Attorney General Michael Mukasey said in Berlin in March after the agreement was inked that Washington was in preliminary talks with other countries on similar bilateral agreements.
"This is a wonderful model... I hope that others will follow, " he said.
On the online searches bill, which would also allow hidden cameras to be installed in the homes of some suspects, German Interior Minister Wolfgang Schäuble said the legislation was "an important block in Germany's security architecture."
Germans are particularly sensitive about any encroachment by the security services on civil liberties due to the egregious abuses of the Nazi and communist regimes.
On Saturday, thousands of protesters took to the streets in 30 cities against the state-sanctioned recording of data from telephone calls. The country's top court ruled in March that the data could only be used in felony investigations, after a complaint signed by 30,000 plaintiffs.