The cabinet has announced support for proposals that would explicitly allow the practice.
Earlier this year, a regional court ruled that circumcision of newborn boys amounted to assault, prompting protests from Jewish and Muslim organizations.
It also raised fears among some of a resurgence in anti-Semitism in Germany.
The new law will make circumcision explicitly legal, as long as it is carried out by trained experts, and parents are informed of any medical risks.
Many people argue that these conditions are probably already met by the communities involved.
The row over circumcision began in June when a court in Cologne said that the ritual circumcision of a four-year-old Muslim boy, in accordance with his parents’ faith, had caused the child bodily harm.
The case came to court after a doctor carried out the circumcision, and it led to medical complications.
The German Medical Association then told doctors across the country to stop performing the procedure – thousands of Muslim and Jewish boys are circumcised in the country every year.
European Jewish and Muslim groups joined forces to contest the ruling, which they said was “an affront (to) our basic religious and human rights”.
Some rabbis have continued to conduct circumcisions despite the uncertainty caused by the ruling.
Rabbi David Goldberg said: “I continue to circumcise because religion is more important than everything else. For me God is all important – more important than a court.”
However, he admitted the legal limbo had caused him a “sense of anxiety”.
And his wife said their son had suddenly been the subject of unpleasant questioning from other children at school.
Jewish leaders say the row has brought anti-Semitism back to the surface in Germany.
The ruling also renewed debate over the practice in the US, one of the countries where circumcision is most common.
In July, Chancellor Angela Merkel’s spokesman said the government should try to establish “legal certainty” on the issue.
The proposed legislation is expected to do just that.
The German parliament is expected to pass the law before the end of the year.
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