Eighty per cent of the members of a new-style House of Lords could be elected under a plan backed by the Cabinet to break the logjam over reform of the second chamber.

In an unprecedented move, when MPs vote on the Lords shake-up in the new year, they will rate the different options in order of preference so that one proposal eventually enjoys majority support after second preferences have been redistributed.

The method, similar to the alternative vote system used in elections in Australia, will ensure that the Commons reaches a clear view on how the second chamber should be modernised. Three years ago, hopes of reform were sunk when all the options were rejected by MPs.

The Commons' decision would have to be agreed by the House of Lords, where some life peers threatened with extinction may oppose the shake-up. But ministers who back reform believe the Lords would endorse change if MPs speak with a clear voice.

Jack Straw, the Leader of the Commons, who chairs a cabinet committee on Lords reform, is proposing the preferential voting system. He wants only half the members to be elected, with half appointed to prevent the Lords challenging the primacy of the Commons.

However, ministers believe the Commons is likely to come out in favour of an 80 per cent elected Lords under the Straw voting plan. This option was rejed by only three votes in 2003 and is backed by Tories and Liberal Democrats.

A White Paper being drawn up by the cabinet committee is expected to suggest that elected peers be chosen at the same time as a general election to prevent the second chamber having a fresher mandate than the Government. A proportional voting system would reflect each party's share of the vote on a regional basis.

The 92 remaining hereditary peers would lose their right to sit and vote in the upper house but some could become life peers. The existing 607 life peers would disappear more slowly, with the reforms phased in over three parliaments.

The Government's proposals have been beefed up by the committee after pressure from two ministers who will stand for the deputy Labour leadership - Peter Hain, the Northern Ireland Secretary and Hilary Benn, the International Development Secretary.

They want ministers, as well as Labour backbenchers, to have a free vote so that they can support a fully elected second chamber. They oppose Mr Straw's plan for party leaders to continue to propose 30 per cent of the members to an independent appointments commission, which would itself choose the other 20 per cent.

Mr Hain and Mr Benn want the Prime Minister to lose his right to put forward names in an attempt to draw a line under the damaging "cash for honours" controversy. Although Tony Blair hopes to make progress before he stands down next year, the legislation would have to be passed by his successor. Gordon Brown, the clear front-runner, is keen on reform, which could form part of a package of measures to restore public trust in politics.

Under the White Paper, the size of the Lords could eventually fall from 740 to between 500 and 550 members, who would be paid a salary rather than allowances for attending. New members would be allowed to serve for a maximum of three parliamentary terms and, after leaving the Lords, would not be able to become an MP for five years.