Troop numbers could be reduced from the current number of 226,000 not only to the so-far announced figure of 185,000 but further to just 158,000 by 2015 according to the report which was quoted by Bild newspaper on Thursday.
The ministry would not comment on the report, saying only that no firm decisions had been made.
Defence Minister Thomas de Maiziére is expected to publish his reform concept towards the end of May or start of June. He has to balance the capabilities required to fulfil Germany's international commitments and the budget limitations placed upon him by the government.
And although cuts have long been expected and planned for, this latest warning from within the ministry is unusually clear.
“The German military contribution will neither be suited to Germany's role in alliances, nor be enough for national security interests. These limitations will, in the mid-term be irreversible,” it said.
Personnel will be so starkly reduced by next year already, that the hierarchy will be damaged for the long term, while weapons systems will be mothballed far more than necessary and German participation in current conflicts will be endangered, the paper said.
“The sacrifice of whole areas of capability... will lead to a loss of competence which will not be able to be compensated for in a foreseeable period in the case of a deteriorated security situation,” the paper said.
Severe cuts are expected in the army, air force and navy, according to Der Spiegel magazine, with a reduction of submarines from ten to six, with ten further mine sweepers, frigates and other ships to be put out of action.
The army would be reduced to two divisions which would each have three brigades – a loss of three divisions and three brigades. The air force would lose five of its 13 squadrons, under the plans.
“Whoever seriously follows these plans is castrating and marginalising the German armed forces, turning them into a cheap, mini army.
"The result would be that Germany would not be able to even start protect itself or its allies – not to even mention humanitarian action such as in Libya,” Ulrich Kirsch, head of the army union told Bild.