Germany's government plans to stop short of an outright ban on the controversial technique of fracking for gas, bowing to pressure from industry, according to the latest draft of a law from the environment ministry seen by Reuters.

Fracking or hydraulic fracturing to extract gas and oil has transformed the U.S. energy market, boosting domestic supplies. The process is banned in France on environmental grounds. It is allowed in Britain but has strict environmental and safety guidelines.

German industry is concerned that its competitiveness is being hurt by rising energy costs at home compared to lower prices in the United States which has seen a fracking boom.

A deterioration in ties with Russia over the Ukraine crisis has also raised pressure on Europe, especially Germany, to cut its reliance on Russian gas and fueled the fracking debate.

Germany is drawing up new fracking rules, and has promised strict environmental audits and a ban on drilling in areas where water is protected due to possible environmental damage.

Environment Minister Barbara Hendricks said the new law would set the bar very high for fracking for gas.

"With this we are setting out the strictest rules for fracking that there have ever been," Hendricks said.

But the draft makes clear that in exceptional cases commercial fracking could be allowed after successful test drilling and the approval of a special committee.

This marks a slight shift from draft guidelines outlined in the summer, where fracking would have been completely banned until 2021 apart from test drilling for scientific purposes.

About 10 percent of Germany's gas comes from domestic sources and fracking has been used in the country for deep-lying or "tight" gas but there has been a de facto moratorium on new permits in the last few years due to environmental issues.

In their coalition deal agreed a year ago, Germany's ruling parties promised to set a legal framework for fracking, saying it had significant potential for risk and rejecting the use of chemicals.

The technique involves pumping water and chemicals at high pressure through drill holes to prize open rocks containing gas.