Action by the conservative-ruled southern state, home to pillars of Germany's auto industry like BMW and Audi, comes as national politicians grapple with the fallout from schemes to cheat regulatory emissions tests.
"We're leading the way in Germany with our measures for cleaner air," state premier Horst Seehofer said, vowing to achieve safe levels of nitrogen oxide in city air "as soon as possible".
Older diesel vehicles that conform to so-called "Euro 5" emissions limits applied from 2009-14 will be upgraded to meet more recent, tougher criteria at no cost to drivers.
A software upgrade would be enough to bring around half of BMW and Audi vehicles used in inner cities into line, the manufacturers told state authorities, promising to begin preparations "immediately".
Bavaria will also take other steps to offer incentives to buy new, less polluting diesel cars, boost public transport and electric cars and buses, and build up cycling infrastructure.
The southern state's measures set it apart from other German regions as the country seeks a response to mass cheating of emissions tests.
In 2015 Volkswagen admitted to installing "defeat devices" in 11 million diesel vehicles worldwide in a scandal dubbed 'dieselgate'. Now suspicion has spread to other firms in the sector including Daimler, Bosch and Audi.
Neighbouring Baden-Württemberg, ruled by a Greens party-led coalition, has flirted with the idea of banning diesel engines from some city roads at times of peak pollution.
On the national level, an August 2 summit between federal and state governments and the car industry will aim to reduce air pollution from diesel while minimising harm to jobs and profits in Germany's biggest industry.