Ministers believe that 18,000 students a year could benefit from the scheme, saving up to £18,000 from the cost of their higher education and significantly increasing the numbers of children from poorer families who go to university.
Under the scheme, any student eligible for free school meals who is accepted for a place at university would have one year's fees paid by the state, said a Government source.
Universities which choose to charge more than £6,000 a year in fees - expected to include elite institutions such as Oxford and Cambridge - will be required to fund a further year's tuition for these students.
The state's share of funding for the scheme will be covered by a £150 million National Scholarship Programme announced by Business Secretary Vince Cable when he unveiled the Government's proposals for an increase in the fees cap from £3,375 to £9,000 from 2013.
Ministers will next week consult with representatives of students and universities before deciding how the Scholarship Programme money will be spent.
But the proposal for a year's free tuition has emerged as the preferred option over alternatives such as an increase in the maintenance grant for poorer students.
It has strong backing from Deputy Prime Minister Nick Clegg, who believes the Government needs to shift the debate away from the political contortions his Liberal Democrats are going through over which way they will vote on fees, and on to the measures being taken to ensure that the package is fair.
Around 80,000 schoolchildren in each year group receive free school meals, available to families receiving Income Support, Jobseekers Allowance, disability benefits, asylum seekers' support and Child Tax Credit.
But fewer youngsters from this group win places at Oxford or Cambridge than go to the pupils of the former schools of Mr Clegg and Prime Minister David Cameron - the fee-paying Westminster and Eton.
Mr Clegg is understood to believe that providing a year's free tuition will encourage more students from disadvantaged backgrounds not only to go to university but also to aspire to Oxbridge places.
Liberal Democrat sources today said it had still not been decided which way their 57 MPs - including Mr Clegg - will vote in Thursday's key House of Commons vote on fees.
Mr Cable sowed confusion with a local newspaper interview on Friday in which he said he had "no doubt" he would vote in favour of the legislation, which as Business Secretary he is responsible for guiding through Parliament.
He had previously suggested he would abide by a collective abstention policy if it could be agreed by the whole parliamentary party, in what was seen as a bid to persuade die-hard opponents of fees such as former leader Charles Kennedy not to vote against.
But within hours of his comments to the Richmond and Twickenham Times, Mr Cable had switched direction again, insisting that the Lib Dems would decide together which way to vote.
The parliamentary party is due to gather for a regular weekly meeting at Westminster on Tuesday, but sources suggested that the final decision may not be thrashed out until the hours before Thursday's vote.
The Liberal Democrats have come under intense pressure from students after promising to abolish fees in their manifesto for this year's election. MPs including Mr Clegg signed a pre-election pledge to vote against any increase.
The proposed increase in fees does not apply in Scotland, and the Welsh Assembly Government has said it will cover any fees over the current level for students who are resident in the principality, wherever they study in the UK.
Mr Clegg today said he would "of course" like to vote for the Government's university funding package, and would like all his Lib Dem colleagues to do the same.
The Deputy Prime Minister told the Independent on Sunday: "Of course I would like everyone to vote for this, we are not there yet."
Many of those opposing fees in the recent wave of student demonstrations appeared not to have taken on board the details of the policy, which would actually be more affordable for low-paid graduates than the current arrangements, he said.
"It's immensely frustrating to me to see a policy which lowers barriers of entry to university being portrayed as putting up barriers," said Mr Clegg.
He accused the National Union of Students of "not being straight" with members about its own support for the graduate tax option, also backed by Labour leader Ed Miliband.
"If you were a care worker starting on £21,000 you pay about £7 a month" under the Government's proposals, he said.
"Under the current scheme you pay £81 a month and under the 2% graduate tax proposed by Ed Miliband it's about £36.
"I believe in this policy. I really think we will look back in 10 or 15 years' time and think, actually that was quite a brave and bold and socially progressive thing to do.
"It's now time for the NUS and Ed Miliband and others to just come clean about what their proposals are, and then in an open contest compare it to what we are doing."
Mr Clegg acknowledged that it was "self-evidently extraordinarily controversial" for the party to back higher fees, given its previous "totemic" policy of abolishing them.
And he recognised it would be difficult to persuade angry students that he has not let them down, saying: "The allegation is made with the heart: it's 'you betrayed me'. And the answer is made with the head. When you have that, the heart always wins."
But he insisted he did not regret leading the Lib Dems into coalition with the Conservatives, describing himself as "absolutely convinced that almost any other course of action would have been a disaster for the country".
Having entered coalition, it was vital for Lib Dems to face up to difficult decisions as soon as possible, he said, adding: "Don't try and run away from it. Don't try to hide it, don't try and paper over it."
Labour leader Ed Miliband accused the Government of "cultural vandalism" over tuition fees, arguing that their plans will set back the cause of social mobility by a generation by entrenching "privilege and inequality" and persuading youngsters from poor families not to go to university.
Writing in The Observer, Mr Miliband dismissed the coalition's argument that the rise in fees is "unavoidable", saying it could have been contained to a few hundred pounds a year.
"This is not unavoidable, it is a political choice and a deeply damaging one," he wrote. "The proposals amount to a rejection of the long-standing recognition of our collective responsibility for higher education."
He said: "Make no mistake - if this bill is voted through on Thursday the Government will deal a cruel blow to the chances of the next generation and betray the hopes of our young people."
Mr Miliband also restated his support for a graduate tax, dismissed by his shadow chancellor Alan Johnson as unworkable.
Asked in an interview for Saturday's Daily Telegraph whether a graduate tax could work, Mr Johnson said: "Well, I don't think it could.
"Frankly, there's a difference of view... I feel it's going to be very difficult to make a graduate tax a workable proposition."
Mr Clegg's chief political adviser Norman Lamb said that a decision on how the Lib Dems will vote would be announced following Tuesday's meeting.
The North Norfolk MP said that both he and the Deputy Prime Minister want to vote for the university funding reforms, but would respect the collective decision of the parliamentary party.
Mr Lamb told BBC1's Politics Show: "My very strong preference, as is the case for Nick, is to vote in favour."
But he added: "We have clear processes. Nick is very keen that he engages with the parliamentary party. We will make our final decision when the parliamentary party meets.
"I want to vote in favour, but I will respect the parliamentary party process. Nick has been very keen to try to get consensus within the parliamentary party. That's a reasonable position for the leader to take ... It's important to try to keep the party united."
Conservative universities minister David Willetts said that Mr Cable was "personally committed" to the fees package.
"I know that Vince is personally committed to this Bill, but we understand the Liberal Democrats have their policy process to go through and we respect that," Mr Willetts told The Politics Show. "We understand the pressures the Liberal Democrats are under."
Mr Willetts said that Mr Clegg was "very committed" to the National Scholarship Programme proposals, because of his responsibility for promoting social mobility.
Asked whether he would like to achieve the previous Labour government's goal of getting 50% of young people into university, Mr Willetts said he did not believe in "top-down targets".
But he added: "I am hoping we will continue to have roughly the same level of students applying to university and going to university as at present.
"I don't have a plan for exactly a 50% target, but I do think more and more people will aspire to go to university and with these proposals we will have universities on a good financial footing so we can meet that demand."
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