The new blueprint would aim to draw a distinction between the big institutional Eurobond holders, who would be exempt from the tax, and smaller-scale purchasers who would not.
The issue is highly sensitive and has provoked warnings that the proposal, designed to stop Europe's citizens avoiding tax by investing their money in foreign banks, could cost up to 110,000 jobs in London.
After a meeting of finance ministers in Dresden, Germany's finance minister, Hans Eichel, said his colleagues had agreed to see if a line could be drawn between bonds held by individual "retail" investors and those held by pension funds and other institutions in the "wholesale" markets.
One colleague added: "Countries were open to the idea of moving closer to Britain, whose objections could be overcome by the fact that the directive concerns personal investments, not institutional investments."
The Treasury yesterday insisted there had been no shift of policy, and some government sources privately doubted that the the compromise idea would prove workable. The Chancellor, Gordon Brown, reiterated British opposition to the inclusion of Eurobonds within the scope of the withholding tax, but hinted that his reservations were being taken on board.
Mr Brown said: "We have always said we will do everything to advance the Eurobond market in the United Kingdom and that we will not agree to any directive that imposes a withholding tax on Britain.
"What is interesting in the last few weeks is that there is a growing understanding of the British position - that we are both determined and right in what we are doing."
Apart from Luxembourg, Britain is alone in holding out against the new measure, under which a tax on interest on savings would automatically be levied.
The City is mindful of the experience of New York, which dominated Eurobond trading before the imposition of a tax resulted in large-scale relocation to London.
However, there is no consensus on how to distinguish between the retail and wholesale market. On idea floated in Brussels, of a threshold of 40,000 euros, above which Eurobond holdings would not be taxed, is widely seen as unrealistically low. An alternative figure of 100,000 euros has been debated.
Mario Monti, acting European Commissioner for the Single Market, said special treatment for big investors was in the spirit of the proposal because the tax "was never intended to apply to interest income of institutional investors or companies". The European Commission wants the tax to be set at a level of 20 per cent.
However, Treasury officials are sceptical that such a scheme would be workable because of the danger of the aggregation of holdings in order to escape the tax.
Although the threshold idea originally received a welcome in some quarters of the City, government sources believe that the Square Mile is getting cold feet.
Luxembourg is resisting the tax unless the bloc persuades neighbouring countries such as Switzerland to adopt similar measures.Reuse content