Chancellor Jeremy Hunt is drawing up the major package amid fears that British Steel could collapse.
The money would be paid in instalments over the next few years if conditions are met, including switching to electric arc furnaces.
Government sources denied the package amounted to a bailout, arguing that similar technology transition deals had been struck in other parts of the economy.
Chinese owned British Steel employs about 4,000 people in Scunthorpe, Lincolnshire. The Government is set to tell British Steel about the potential deal in the coming days, according to Sky News.
The strings attached could include a promise from Jingye Group to invest at least £1billion in the company by the start of next decade.
Once a giant of UK manufacturing, British Steel has fallen on hard times in recent years.
Chinese based company Jingye is its third owner in four years.