In March, the ministry had indicated the blending quota on diesel fuel would be as high as 5.75 percent.

The quotas will be tradeable, meaning that oil refineries which voluntarily use more than the minimum amount of biofuels will be able to sell the surplus quota to those that undershoot the target.

Finance Minister Peer Steinbrueck said the deal strengthened biofuels' position in Germany.

"This ensures that biofuels will play a significant role on Germany's mineral oil market in future," he said.

In March, Germany's cabinet approved plans to end special tax breaks for biodiesel, which foresaw a 10 cent tax per litre of the fuel sold at petrol stations and a 15 cent tax per litre on biodiesel used for blending at refineries.

However, the ministry said the biofuel content within the blending quotas would be subject to the normal rate of taxation on conventional fuels. This is presently between 65 and 72 cents per litre of petrol and between 47 and 49 cents for diesel.

Steinbrueck's ministry said the new measures would generate an additional 1.6 billion euros (US$2.03 billion) in tax revenues next year, 1.7 billion in 2008, and 2.3 billion in 2009. In 2010, the figure would dip slightly to 2.2 billion, it added.

The ministry said subsidies on pure biofuels would continue to be granted for a transitional period lasting until the end of 2009, initially using the tax rates valid from August 2006.

The ministry noted there would be regular checks on whether support for biofuels was exceeding European Union limits.

It said that pure biofuels used in agriculture would remain exempt from taxation in future.