Controversial plans to make it easier for companies to "hire and fire" workers may be revived by George Osborne in next month's Budget but have provoked a fresh battle with the Liberal Democrats.

The Chancellor is under pressure from Conservative MPs to relax employment protection laws as part of a "go for growth" package to be included in his Budget on 21 March. David Cameron is sympathetic to the backbench demands but they are being strongly opposed by Nick Clegg and Vince Cable, the Liberal Democrat Business Secretary.

There was a similar row last autumn after Adrian Beecroft, a multi-millionaire venture capitalist and Tory donor, proposed in a review ordered by Downing Street that all firms should be able to axe poorly performing staff without the risk of being taken to an employment tribunal. Government insiders said the proposals were being "dusted down" as the Chancellor considers his options. However, a Lib Dem source said: "We are not against reform but we are not going to bring in a hire and fire culture."

Mr Cable and Norman Lamb, the new Business Minister, will shortly issue a "call for evidence" on a watered down version of the Beecroft report. This would limit the "fire at will" proposal to the three million people employed by firms with fewer than 10 workers. But the two Lib Dem ministers will make clear they have no intention of turning the proposal into law by stopping short of a full-scale consultation exercise. Instead, they favour an informal, conciliatory approach to resolving disputes between employers and staff accused of poor performance.

One source said: "In many cases, employers are terrified they are stuck in a difficult situation with an employee and can't do anything about it. We have to tackle that perception, which is quite often myth. That doesn't mean stripping away employment rights. There are other ways of tackling the problem that don't involve taking away the rights of workers."

One option is for a "protected conversation" between bosses and workers about leaving or retiring which could not be used in evidence at any subsequent tribunal hearing. Another would be a process, possibly involving the conciliation service Acas, under which firms draw up a letter telling an employee he or she could be dismissed and offering a small severance payment. The worker could leave quickly with their head held high but could also turn down the offer – so their rights would not be eroded.