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Media commentator Steve Hewlett said people in the newspaper industry were "furious"
Senior politicians have rejected the newspaper industry's version of a royal charter setting up a press regulator, the BBC's Newsnight has reported.
A source said a sub-committee of the Privy Council, containing Lib Dem and Tory cabinet ministers, thought the proposals were "flawed".
But sub-committee chair Danny Alexander insisted no decision had been made.
The full Privy Council is also looking at an alternative plan backed by politicians and campaigners.
It is due to announce its decision on the press proposals on Wednesday and the alternative plan on 30 October.
Press regulation options are being considered in the wake of the Leveson Inquiry, which was set up in July 2011 after it emerged journalists working for the now-closed News of the World had hacked into the mobile phone of murdered Surrey schoolgirl Milly Dowler.
Politicians and the press have been at odds over the details of a royal charter - a formal document used to establish and lay out the terms of a body - to underpin the regulator.
The government's proposals published in March have cross-party backing and the support of campaign group Hacked Off.
There are a series of key differences between the industry's plan for press regulation and that agreed by politicians and campaigners.
Rejection 'likely'End Quote Brian Cathcart Hacked Off campaignWe want Parliament's royal charter - Leveson's royal charter - and we want it now"
Newsnight's political editor Allegra Stratton was told Privy Council members felt proposals for self-regulation put forward by newspapers did not meet the requirements of Lord Justice Leveson's report.
Mr Alexander, who told the BBC the sub-committee met on Monday and the full Privy Council will meet on Wednesday to consider the press proposal, said there were a "few remaining" details to be decided - but insisted "no final decision has been made".
But ministers "do look set to reject" the form of regulation put forward by newspapers, BBC political editor Nick Robinson said.
The Privy Council sub-committee consists of four Tories and two Lib Dems - and both parties have been critical of the press proposals - he added.
The full Privy Council is expected to endorse the recommendation of the sub-committee when it meets on Wednesday.
Steve Hewlett, presenter of BBC Radio 4's The Media Show, told Newsnight that newspaper publishers felt the process had been far from transparent.
He said: "People I have spoken to are furious and are now considering whether there might be a legal challenge to this decision by the Privy Council."
The newspapers' proposals would:
- Omit a ban on peers and former editors serving on the newly created "recognition panel", which will decide in future whether newspapers are being regulated properly
- Deny Parliament the power to block or approve future changes to regulation. Instead the regulator, trade bodies and the recognition panel would have to agree to changes
- Give the regulator the power to "require" - rather than "direct" - the nature, extent and placement of corrections.
Trevor Kavanagh, associate editor of the Sun, said the news was not a shock.
"It's what we'd been given fairly clear clues would happen," he said.
"I think it has to be seen as a great victory for the forces of oppression of a free press - Hacked Off in particular - and the politicians who have gone along for the ride."
Brian Cathcart, executive director of Hacked Off, said the press's plan had been a "delaying manoeuvre" by the big national newspapers.
"The problem with the papers is that they do not want to deal fairly with complaints," he said.
Mr Cathcart said there was a "rare unanimity" in Parliament on this issue, and the press was refusing to compromise "like an errant child on the naughty step with his fingers in his ears".
He said only the press stood against the consensus in politics and the public which said: "We want Parliament's royal charter - Leveson's royal charter - and we want it now."
Earlier, Gerry McCann said the newspaper industry's plans for press regulation were "a gentlemen's club agreement" and should be rejected by politicians.
The father of missing Madeleine McCann said the recommendations of the Leveson Inquiry were the "minimum acceptable".
Mr McCann and his family were subject to intense press attention after Madeleine went missing while they were on holiday in Portugal in 2007.
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