Fathers of babies could get the right to take three months' leave with a state allowance of £106 a week.
The new bill is expected to be published on Wednesday
The Work and Families Bill extends paid maternity leave from six months to nine months, but fathers rather than mothers could take the last three months.
Trade secretary Alan Johnson said fathers wanted to play an "important" role in their children's early years.
The bill could also give flexible working rights for people responsible for the caring of adult relatives.
Current rules entitle working mothers to six months' paid leave, followed by six months' unpaid time off.
The new bill would extend the paid period to nine months.
It would also allow fathers to take the second six months of leave instead of mothers, with the remaining three months' money - £106 a week - being transferred to them.
Mr Johnson said he expected around 9,000 fathers to take up the offer from 2007, adding: "It's about fairness and promoting social justice."
The government, he said, was planning to extend paid leave further - from nine to 12 months - by the next election.
'Helping the economy'
This meant fathers could receive a full six months' statutory pay.
Mr Johnson said having more women in work would help the economy.
But it was not a case trying to encourage couples to have more children, or "breeding for economic success".
Mr Johnson called for an end to the "cartoon generalisations" of fathers doing little more than "buying a round of cigars" when a baby is born.
Where a woman's career was more important to a household, it should be possible for her to return to work while the man looked after childcare.
But the Federation of Small Businesses and the British Chambers of Commerce said it was "very concerned" about the proposals.
BBC correspondent Kim Catcheside said the changes could impose significant costs on employers, especially if they came under pressure to pay the full salaries of fathers on leave, as many currently do for mothers.
The Equal Opportunities Commission, meanwhile, has welcomed the proposed changes.
It says babies are the "workers of the future" and more should be done to increase ways of caring for them.
Adrienne Burgess of Fathers Direct, a national information centre on fatherhood, said it was "an important first step" in allowing parents to decide who is going to look after the baby.
But the main need was to give fathers "good wage replacement levels" to make these choices practical.
TUC general secretary Brendan Barber said: "This bill is another significant step along the road to making work family-friendly."
However, CBI deputy director-general John Cridland said the "inevitable administrative burden" had to be shared.
The bill left "employers guessing as to whether they will be able to hand back to the government the burden of administering maternity pay".