The proposal is aimed at ending turmoil surrounding the Orthodox establishment's monopoly over the site, highlighted by the arrests of female worshippers who prayed while performing religious rituals the Orthodox say are reserved for men.
"One Western Wall for one Jewish people," said Natan Sharansky, chairman of the quasi-governmental Jewish Agency and mastermind of the proposal. He expressed hope that the site "will once again be a symbol of unity among the Jewish people, and not one of discord and strife."
While it still needs government approval, the proposal already risks upsetting Israel's powerful ultra-Orthodox community as well as the Western Wall's Muslim neighbors, reflecting the explosive mix of religious sensitivities in the area.
The Western Wall, a retaining wall of the biblical Temple compound, is the holiest site where Jews can pray. Currently, it is divided into men's and women's sections. Orthodox rabbis, who control Israel's religious institutions, oppose mixed prayers.
Under the plan, Israel would create a permanent area for mixed-gender and women-led prayer. It would be situated in an area on a lower level where limited mixed prayer already is allowed, but which mainly serves as an archaeological site.
The area would be renovated with a platform that would place it at the same level as the rest of the Western Wall plaza and operate around the clock, like the men's and women's sections.
It also would be easily accessible from the main entrance to the plaza. Like the other sections, it would be stocked with Torah scrolls and prayer books. Currently, worshippers must bring their own prayer materials.
Rabbi Gilad Kariv, who heads Israel's Reform Jewish movement, said that the proposal could become a watershed moment for liberal Judaism.
"If the Israeli government embraces the solution, I think it's a breakthrough of relations between the Israeli government and the progressive Jewish world," Kariv said.
He said he believed "there are good chances" that Prime Minister Benjamin Netanyahu's new Cabinet, which does not include any ultra-Orthodox parties, will support the plan.
A spokesman for Netanyahu declined comment. But in a boost for the plan, the Western Wall's Orthodox rabbi, Shmuel Rabinowitz, endorsed the new prayer section.
"I want everyone to pray according to Orthodox Jewish religious law, but I don't interfere," Rabinowitz told Army Radio. "If these things can be done at the Western Wall without hurting others, and this can bring about compromise and serenity, I don't object."
While most Israelis are secular, Judaism has a formal place in the country's affairs, and Orthodox rabbis strictly govern religious events such as weddings, divorces and burials for the Jewish population. The ultra-Orthodox, who follow their strict brand of Judaism by promoting religious studies over work, military service and other involvement in modern society, wield vast political power, although they make up only about 10 percent of the population.
The Orthodox rabbinate has fiercely resisted inroads by the progressive Reform and Conservative streams of Judaism, refusing to recognize their rulings, conversions or ceremonies as religiously valid.
This has led to a deepening rift with American Jews, most of whom are affiliated with the liberal streams.
Nowhere has this conflict been more visible than at the Western Wall. Women of the Wall, a group that conducts monthly prayer sessions there, have endured arrests, heckling and legal battles in a struggle to attain what they consider their inalienable right – praying and worshipping at the Western Wall as men do. Under Reform and Conservative Judaism, women may be ordained as rabbis, read from the Torah or Jewish holy book, and wear prayer shawls.
The proposal's acceptance would be the latest in a series of achievements by Reform and Conservative Jewish streams to win recognition in Israel, where their communities are small compared to the Orthodox.
Last year, Israel agreed to grant state funding to some non-Orthodox rabbis; Orthodox rabbis are paid by the government.
In 2010, the Israeli government froze a controversial bill that would have strengthened Orthodox control over Jewish conversions. The same year, Israel began allowing Israelis with no declared religion to marry outside the strict religious establishment – giving hope to many who reject the Orthodox monopoly on family matters. Civil marriages are generally banned in Israel.
These small steps toward recognition, including the new plan, have angered some in the ultra-Orthodox community, who see such concessions as part of a slippery slope that could threaten their customs.
"The moment we allow these groups a foothold, then tomorrow they will start to restrain us in our own synagogues, in the name of democracy, in the name of liberalism and in the name of pluralism," said Shmuel Poppenheim, an ultra-Orthodox activist who serves as a spokesman for the community.
The plan was also criticized by the Muslim religious authority that oversees the nearby Al-Aqsa Mosque compound. Any Israeli changes to the compound, real or perceived, have set off violent clashes in the past.
The head of the Islamic religious authority in Jerusalem said the area, which lies near the Mughrabi Gate and footbridge that lead to the Al-Aqsa compound, was disputed and Israel should not claim it.
"If they pray in this place now, tomorrow they will say it's a Jewish sacred place and will take it forever," said Izzam al-Khatib, head of the Islamic religious authority in Jerusalem.
While the Jewish Agency has not released full details of its plan, Sharansky said that in order to respect Muslim sensitivities, the arrangement would not touch the Mughrabi Gate and footbridge.
Women of the Wall will hold their monthly prayer service at the holy site on Thursday and a showdown with police is expected, as with previous monthly visits. Israeli police spokesman Micky Rosenfeld said police would strictly enforce restrictions against women wearing religious garments, in order to lower tensions in the area.
Women of the Wall cautiously welcomed the proposal.
"The principle is the most important issue here," said Peggy Cidor, a board member of Women of the Wall. "The most important thing for us is that someone has at last understood that this cannot continue."