The car industry has been hit hard by the economic slowdown
The government is likely to introduce an incentive scheme for car owners to scrap old vehicles in exchange for new ones, the BBC has learned.
The move would probably involve a payment of £2,000 to trade in cars that are a certain number of years old.
The controversial plans are designed to boost demand for new cars and help struggling carmakers who are suffering during the recession.
A similar scheme in Germany has seen demand for new cars rise dramatically.
France and Italy have also introduced so-called car scrappage schemes to boost their beleaguered car industries.
Details of the UK scheme are likely to be announced in the Chancellor's budget on 22 April, according to BBC correspondent Joe Lynam.
"A scrappage scheme will provide the incentive needed and the evidence is clear that schemes already implemented across Europe do work to increase demand," said Paul Everitt at the Society of Motor Manufacturers and Traders (SMMT).
The government has been reluctant to introduce a scheme at a time when its finances are being stretched by a series of economic stimulus packages.
It is also concerned about supporting one struggling industry over another.
But it appears that the dire state of the automotive industry has forced its hand.
Car sales fell by almost a third in March this year compared with last year.
The drop was viewed as particularly disappointing given that March is the month for new car registrations and sales are, therefore, usually strong.
Car production has been affected even more dramatically, with the number of new cars produced in the UK falling by a record 59% in February, year-on-year.
This represents the largest monthly fall since records began in 1970, according to the SMMT.
Carmakers have been forced into drastic action in order to survive.
For example, Honda has closed its Swindon plant for four months, while Toyota has reduced pay across its UK factories by 10%.
While sales have been falling in the UK, new car registrations in Germany rose 40% in March and by 10% in France after both countries adopted scrappage schemes.
In Germany, drivers get 2,500 euros (£2,250; $3,299) for trading in a car more than nine years old, while in France motorists can receive up to 1,000 euros. Scrappage has also recently been introduced in Spain.
The UK government has already announced some help for UK carmakers.
In January, it revealed its £2.3bn Automotive Assistance Programme to provide loans to troubled car manufacturers, while Jaguar Land Rover has been granted £27m to develop a fuel efficient vehicle.
But car scrappage schemes are seen as targeting the root cause of the industry's woes - a lack of demand for its products. They also, the government argues, help the environment by replacing old, inefficient vehicles with cleaner, more efficient ones.
However, their environmental credentials are not universally accepted.
"This scheme won't create jobs and it won't help the environment. All that you're going to get is a switch to more polluting, bigger vehicles. And that's not going to help anyone," said Peter Cranie of the Green Party.