The new scheme to plug the mudflow, which began following an oil-drilling accident last May, is expected to cost $68m (600bn rupiah ).
Several villages have been entirely destroyed after being swamped by mud and more than 15,000 people are believed to have been forced from their homes.
Oil firm blamed
The government has told PT Lapindo Brantas, the operator of the well from where the mud has been flowing, to pay for the cost of stopping the mud-flow and to compensate local residents who have been affected.
Lapindo had been told by the government to pay $430m (3.8 trillion rupiah) but officials say the cost could be double.
The government has agreed to cover costs related to the disaster's social impact on people living outside swamped areas.
In February, engineers began dropping 1,500 concrete balls down the mouth of the volcano but the mud has not stopped flowing.