Germany is ready to drop its resistance to raising the lending capacity of the euro zone firewall by combining the means of both bailout funds for a limited time, German news magazine Spiegel reported, citing unnamed government sources.

German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble no longer wanted to hold out against pressure from European partners and the International Monetary Fund to boost the firewall, Spiegel said, paving the way for an agreement at a meeting of euro zone finance ministers on March 30-31.

The temporary European Financial Stability Facility (EFSF), and the permanent European Stability Mechanism (ESM) could be held operational for a transition period, Merkel and Schaeuble had decided, it said.

Two options were under discussion, one combining the ESM's 500 billion euros (418 billion pounds) with 200 billion euros from the EFSF already earmarked for Greece, Portugal and Ireland. The other option would allow the funds to run together at a full combined capacity of 940 billion euros.

A spokeswoman for the finance ministry declined to comment on the Spiegel report, but said European partners had agreed to consider the lending capacity of the bailout fund at their meeting at the end of March.

Discussions are still continuing but we are optimistic that a solution will be finalised at the meeting in Copenhagen which is satisfactory to all, she said.

Merkel has faced domestic pressure to resist any increase to the firewall.

(Reporting by Alexandra Hudson)