Party leaders have been wrangling for months over whom to nominate as a successor to President Joachim Gauck, a 76-year-old pastor from the ex-communist East Germany who is stepping down due to his advanced age.
Chancellor Angela Merkel's conservative bloc agreed on Germany's most popular politician, Steinmeier, whose name had been put forward by his Social Democratic Party (SPD).
Merkel, who was unable to put forward a viable conservative candidate, called the choice of Steinmeier a "sensible decision" that would stand for "stability, particularly in these uncertain times", during a conference call with party leaders, participants said.
The new president -- a figure who is meant to transcend party politics and serve as a moral standard bearer for the nation -- will be elected on February 12 by a special assembly of MPs, delegates from the 16 federal states, and other notables.
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Steinmeier, 60, has emerged in recent months as the German government's most strident detractor of US president-elect Donald Trump.
He warned a day after Trump's shock election that transatlantic relations would become "more difficult".
During the US campaign, Steinmeier was even more damning, saying the prospect of a Trump presidency was a "frightening" prospect for the world.
He compared Trump to a "hate preacher", saying he had much in common with "fearmongers" in Germany's right-wing populist AfD party as well as advocates of Britain's exit from the EU.
A veteran of the German political scene and a familiar face in world capitals, Steinmeier served as Merkel's vice-chancellor and chief diplomat during her first "grand coalition" government from 2005 to 2009.
While his Social Democrats have praised his approach as in keeping with their long tradition of Ostpolitik, critics have accused him of being a "Russlandversteher" -- a "Russia apologist".
He raised eyebrows in many capitals in June when he warned NATO against "sabre-rattling and warmongering" after it conducted military exercises in eastern Europe in response to the perceived threat posed by Russia.