Under proposals which will be put to the vote on Friday, far-right demonstrations will be kept away from sites dedicated to victims of the Nazis.
Rallies which glorify or play down Nazi violence and tyranny will be banned as part of plans to broaden the definition of criminal incitement.
Germany's new central Holocaust memorial will be specially protected, whereas the country's 16 federal states will decide which historically sensitive sites to safeguard.
The Interior Ministry was spurred into action by far right plans to march past the memorial in central Berlin and sweep through the Brandenburg Gate on 8 May, 60 years after Germany unconditionally capitulated.
The lower house of parliament is expected to pass the new measures on Friday after weeks of debate and disagreement.
The upper house is set to follow suit a week later so the proposals can take effect by April.
"With these legal amendments NPD demonstrations aimed at particular sites can be better prohibited," Volker Beck, the parliamentary leader of junior government partners the Greens, said after cross-party talks.
The NPD, a party the government likens to the early Nazis and has tried unsuccessfully to ban, is gaining in profile after winning seats in regional elections last year.
Last month, 5000 neo-Nazis marched through Dresden to stage their own commemoration of the 60th anniversary of a massive Allied bombing raid on the city, to the dismay of many residents and politicians.
Later the same day up to 50,000 residents gathered in the town to remember all victims of war and to protest against the far-right's exploitation and manipulation of history.