Economy Minister Philipp Rösler and Environment Minister Peter Altmaier reached a hard-won agreement on restrictions for using the contentious method to extract natural gas from rock.
"Fracking offers considerable opportunities, but we have to keep the potential effects on the environment in mind," said Rösler on Tuesday.
"That's what we are now implementing. The industry has said it will develop environmentally friendly methods," he added.
Altmaier emphasised that potential risks for citizens would have to be ruled out with careful, rigorous studies into the environmental impact to be conducted at each proposed site.
"Safety and environmental protection have priority over economic interests," the minister said. "It's a signal that we're serious about protecting the environment and
A joint draft proposal from the two ministries released on Tuesday would ban fracking in areas where there are water reserves and mineral springs.
This is a concession to serious public concerns about safety, as well as the environmental and health effects of the technology.
"Domestic oil and gas production will continue to make a substantial contribution to the security of supply and price stability in Germany," as the country has pledged to abandon nuclear energy entirely by 2022, the ministries said.
Estimates put Germany's underground gas reserves at up to 2.3 trillion cubic metres.
With annual consumption of some 86 billion cubic metres "this can be categorised as a very significant source of energy," said the ministries.
"Hydraulic fracturing" or fracking, has unlocked immense gas and oil resources and changed the geopolitics of energy. Since it was developed in 2007 it has been described as the gold rush of the 21st century, creating tens of billions of dollars of revenue and hundreds of thousands of new jobs.
But the technique, which involves injecting a water, sand and chemical mix at high pressure into the ground to create fractures in rocks and rock formations and thus enabling oil or gas to be released, is controversial.
The chemicals used can end up in the water table, creating health and environmental concerns.
Fracking has been banned in France since 2011 but Altmaier promised to introduce legislation in the German parliament on the topic before federal elections on September 22.