The bill is expected to be passed by parliament early next year.
Norway is already one of the most restrictive societies in Europe when it comes to smoking, with curbs on smoking in all offices and public buildings.
Bars, restaurants, cafes and hotels currently have designated smoking areas, although the government says that 30% of municipalities have no regular inspection of premises.
Smoking is also heavily taxed, with a pack of 20 cigarettes costing about 62 kroner ($8.50).
Heavy pressure
Under the new legislation, people in Norway would only be allowed to smoke in their homes or outside.
The proposal comes after heavy pressure from restaurant workers' unions who say their members have a higher incidence of lung cancer than others due to passive smoking.
In all, the Health Ministry says between 300 and 500 people die of passive smoking in Norway each year.
But critics argue a ban would infringe on the individual's rights in public places.
"We are very disappointed," Knut Almquist, managing director of the Norwegian Hospitality Association, told the Associated Press news agency. "The government has clearly decided to ignore the industry's role as a host, where over half our guests would like to smoke when they are out."
They also say it would be difficult for smokers to limit their habit to the outdoors in a country with sub-zero temperatures for several months a year.
Debate
Around 30% of Norwegian men and 29% of women smoke daily, though many more are irregular social smokers.
The bill is expected to be discussed in parliament next spring.
If passed, the new law on smoking will come into effect from January 2004.
Several states and cities in the USA, Canada and Australia already have similar bans.