The bill, which still needs to go through parliament, would allow adults to possess up to 25 grams (0.9 ounces) of cannabis and grow up to three plants for personal use.
People will also be allowed to join non-profit "cannabis clubs" of up to 500 members where the drug can be legally cultivated and purchased.
Health Minister Karl Lauterbach called the draft law "a turning point" in Germany's attitude towards cannabis.
The more relaxed approach would crack down on the black market and drug-related crime, ease the burden on law enforcement and allow for safer consumption of marijuana, he said in a statement.
Minors will still be prohibited from using the drug, and the government will launch a campaign warning of the health risks for young people especially, he added.
"Nobody should misunderstand the law. Cannabis use will be legalised. But it's still dangerous," Lauterbach said.
READ ALSO: Why is Germany's cannabis draft law so controversial?
The proposed legislation is a flagship project of Chancellor Olaf Scholz's three-party coalition and would leave Germany with one of the most liberal cannabis policies in Europe.
But the draft law is less ambitious than what was originally envisioned. Plans to allow the widespread sale of cannabis in licensed stores were dropped in April after the European Commission raised concerns.
'Irresponsible'
With its current plan, Germany's coalition government has taken "a significant step towards a progressive, realistic drug policy", said Agriculture Minister Cem Ozdemir.
But conservative politicians remained unconvinced.
Bavaria's regional health minister Klaus Holetschek from the opposition, centre-right CDU party called the plans "irresponsible" and said examples from abroad had shown that liberalisation does little to curb the black market.
Decriminalising the use of weed also "blatantly endangered" people aged 18 to 21, he said, pointing to the health risks of cannabis consumption on still-developing brains.
The German Judges Association meanwhile said the legislation would create more red tape and add more stress to the judicial system, rather than relieving it.
The "small-scale law" would lead to "many new disputes and proceedings before the courts", it said.
If the bill goes through, the government aims to review the societal impact of the new legislation after four years.
The government has also said it plans to follow up with a second phase that would involve trialling the production and sale of cannabis in specialised stores under government licences in selected regions.
With the planned legislation, Germany will be joining a string of countries that have relaxed rules around cannabis use.
Malta became the first European Union member to legalise recreational cannabis in 2021, while the Netherlands has tolerated the sale and use of cannabis in so-called coffee shops since the 1970s.
Uruguay became the first country in the world to legalise the production, distribution and consumption of marijuana in 2013.
In the United States, dozens of states including California have changed their laws in the past decade to allow people to light up.
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