Government insiders said the Prime Minister could announce the change as soon as this week's Cabinet reshuffle, although he is more likely to wait until the publication of a countryside White Paper in the autumn.
The move is designed to placate the vocal rural lobby groups, who have been angered by the Government's attempts to ban fox-hunting. "This is a symbolic way of showing the rural community that it has representation in Cabinet," one senior Whitehall source said.
The establishment of a new department is proposed in a confidential policy document on "rurality", produced by the Government's influential Performance and Innovation Unit, based in the Cabinet Office. It has been discussed by ministers at a senior level.
It would include the responsibilities now covered by the Ministry of Agriculture, Fisheries and Food - which is already being broken up by the establishment of the new Food Standards Agency. Nick Brown, the Agriculture Minister, who is popular with farmers, has been tipped to head the new department. It would also incorporate the "rural" responsibilities of the Department for the Environment, Transport and the Regions, including possible legislation on the right to roam, countryside regeneration, and the protection of special natural sites.
Downing Street believes that the creation of the new department would relieve pressure on John Prescott and allow him to concentrate more on transport policy. The current DETR is widely regarded as sprawling and unwieldy and Mr Blair wants to streamline it to focus attention on tackling congestion and delays in public transport.
The Prime Minister was at Chequers last night putting the final touches to his reshuffle. He wants to strengthen his hold on Government and improve links between the Labour Party and Whitehall in an attempt to turn policy ideas into action.
Peter Mandelson, who resigned as Trade and Industry Secretary last year over his home loan, is now convinced that he will not get back to power this time. Mo Mowlam is resisting moves to shift her from Northern Ireland, although Mr Blair is keen to give her a job back in Whitehall. Paul Murphy, a junior minister at the department, is a candidate to get her job if she is moved.
Several ministers are tipped for the chop, including Tony Lloyd at the Foreign Office, Alan Meale at the DETR, John Battle at the DTI and possibly Jack Cunningham, the so-called Cabinet "Enforcer".
Insiders indicated that Mr Blair was backing away from the idea of appointing a Party Chairman, with full Cabinet rank, as this would require approval by Labour's ruling National Executive Committee.
However, he met Margaret McDonagh, Labour's General Secretary, last week to discuss ways to strengthen the link between Whitehall and the party's Millbank headquarters.