(Corrects name of environment minister in sixth paragraph)
* Volkswagen, Daimler, BMW could offer trade-in - sources
* Transport minister favours trade-ins over hardware refits
* Funds to be found to upgrade commercial vehicles
* Germany's Merkel meets with ministers on diesel issue
By Gernot Heller
BERLIN, Sept 28 (Reuters) - The German government is on track to find a solution for tackling pollution from diesel vehicles but there is no agreement yet, a government source said after Chancellor Angela Merkel chaired a meeting on Friday in Berlin.
Final details of a deal that seeks to avert bans on older vehicles from city streets should be hammered out when leaders of Merkel's coalition of conservatives and centre-left social democrats meet on Monday.
"We're on a good track," the source told Reuters. "There are only details that need to be cleared up."
Merkel has set an end-September deadline to find a way to tackle pollution from diesel vehicles, and avert more driving bans in cities that are being forced by courts to take action to improve air quality.
Yet her government has been split on how best to tackle the problem, with Transport Minister Andreas Scheuer siding with carmakers in calling for incentives to encourage owners of older models to trade them in for newer, cleaner ones.
Environment Minister Svenja Schulze has, meanwhile, called for hardware retrofits on older models - an option that the industry says is only feasible in some cases but which would hit fuel consumption and performance in others.
"We significantly narrowed our differences at today's meeting," said deputy environment minister Florian Pronold, standing by his ministry's call for retrofits and saying they should be paid for by manufacturers.
Volkswagen, Daimler and BMW could offer owners of older vehicles that meet the Euro 4 emissions standard, as well as owners of some Euro 5 standard models, to trade in their cars for new ones, sources said before the meeting.
Scheuer, also speaking before the talks, told broadcaster n-tv that he would propose such incentives, saying the most effective way to reduce air pollution was to renew the fleet of cars plying Germany's city streets.
Any solution is likely to cost several billion euros. Scheuer said this week that car owners and taxpayers should not foot the bill.
In separate comments on Friday, he said he supported hardware upgrades for around 30,000 commercial vehicles, telling the Redaktionsnetzwerk Deutschland newspaper group they could be funded from an existing clean-air programme.
Earlier on Friday, the FAZ newspaper reported that carmakers may offer owners of vehicles affected by driving bans vouchers for hardware upgrades by suppliers such as Baumot or HJS, without citing sources.
FAZ said the scheme would apply to some Euro 5 diesel vehicles and would cover 80 percent of the cost of upgrades, up to a maximum level of 3,000 euros ($3,500) per vehicle.
Older vehicles meeting the Euro 4 standard would not be covered, but their owners would be offered incentives to swap their vehicles for new ones, it said.
Daimler, Volkswagen and BMW declined to comment.
$1 = 0.8603 euros Additional reporting by Jan Schwartz and Maria Sheahan; Writing by Tassilo Hummel and Douglas Busvine; Editing by Mark Potter and Elaine Hardcastle