London mayor Ken Livingstone and Culture Secretary Tessa Jowell have agreed a deal to split the cost of staging the Games in the capital.

Although the Department of Culture, Media and Sport insisted there was no "done deal yet" and a decision on the bid will not be reached until next week, it is a sign that the government is warming to the idea.

The plan would see the estimated �2.6bn cost split between a �1.5bn package from the government and �1.1bn provided by the capital.

Half of the �1.1bn will come through the London Development Agency and half through council taxpayers.

The culture secretary and the capital's mayor held "very productive and very useful" talks on Thursday, said a DCMS spokesman.

The package will be presented next Thursday to the Cabinet, which will then decide whether the bid should go ahead.

It must convince Chancellor Gordon Brown, who earlier this month said that staging the Games must not be at the cost of reform to schools and hospitals.

The DCMS spokesman said: "There isn't a done deal yet. There is still a huge number of details to work through. We cannot put the cart before the horse."

Mr Livingstone said: "The meeting was extremely positive and constructive and I'm delighted that we have been able to agree a robust financial package that will enable an Olympic bid to be made.

"It is a fair deal for London. Overall, we can expect �5bn in investment for a maximum contribution of London taxpayers of �550m."