The constitutional change, which has been sought by Erdogan since he became president in 2014, would see Turkey switch to an executive presidency.
The constitutional change, which has been sought by Erdogan since he became president in 2014, would see Turkey switch to an executive presidency along the lines of the United States or France.
But it has become the latest polarising issue surrounding the Turkish strongman, who has been accused by opponents of increasingly authoritarian rule especially after the attempted coup in July.
The drive for the change comes at a critical time for Erdogan, with the relentless crackdown after the coup straining ties with the West and the Turkish lira under severe pressure.
"Our proposal to change the constitution will be submitted to the Turkish parliament tomorrow," Prime Minister Binali Yildirim said on Friday.
The announcement followed months of talks between the ruling Justice and Development Party (AKP) led by Yildirim and the Nationalist Movement Party (MHP).
The MHP is the fourth largest party in parliament but the AKP needs its support for the 330 votes required to call a referendum on the issue.
Yildirim said the bill would "save our country" from coups after Erdogan saw off a putsch aimed at ousting him from power on July 15.
Turkey had on three previous occasions since 1960 seen governments directly ousted by the military, which considers itself the guardian of secular Turkey.
"We continue to work on changing the system to ensure instability is removed from Turkey's political history absolutely," Yildirim said.
The AKP has only 316 seats (excluding the speaker of the parliament) and needs at least 14 votes from the MHP to secure a three-fifths majority required to call the referendum.
Deputy Prime Minister Nurettin Canikli told broadcaster A Haber that "consensus had been secured" between the MHP and AKP and a referendum could take place in March, April or May.
The main opposition Republican People's Party (CHP) and the pro-Kurdish Peoples' Democratic Party (HDP) vehemently oppose changing the parliamentary system.
HDP co-leader Selahattin Demirtas, who made it a political crusade to oppose the new system, is currently under arrest on charges of terror group links along with nine fellow HDP MPs.
CHP leader Kemal Kilicdaroglu said the changes risked wrecking the parliamentary system that goes back to reforms in the late Ottoman Empire.
"This is a regime change, not a system change," he told NTV television.
"This country has a 140-year parliamentary system tradition. There are disruptive directions here and they can be corrected."
Erdogan became president in August 2014 after more than a decade as premier and immediately revamped an office which had until then had been seen as largely ceremonial.
The vast new presidential palace in Ankara, opened shortly after he took office, is an opulent symbol of the president's power employing hundreds of staff while previous heads of state had only dozens.
Canikli said any changes will be enacted in 2019 when presidential and parliamentary elections will be held simultaneously.
The contents of the bill are expected to be unveiled on Saturday but parliament is not expected to hold the vote immediately.
The government has remained tight-lipped on the actual contents of the bill but key changes could include the abolition of the office of the prime minister and replacement with two vice presidents.
A key question will be if under a new constitution the clock starts again on Erdogan's maximum of two five-year presidential mandates -- meaning he could stay in power to 2029.