Culture Secretary Karen Bradley has insisted she will not be rushed into activating regulations which could see newspapers face "exemplary" damages if they are sued for libel unless they sign up to a state-backed system of press regulation.
The Press Recognition Panel (PRP) - which was established in the wake of the Leveson Inquiry into press standards - is due to rule on Tuesday whether to recognise Impress, a new regulator set up by Hacked Off campaigner Max Mosley.
If it does, Ms Bradley will have to consider whether to activate Section 40 of the Crime and Courts Act 2013 which would mean that any newspaper that refused to sign up to the new regulator could have to pay the legal fees of a complainant who sued them for libel, even if the paper won the case.
The move has angered many newspapers who have overwhelmingly rejected the idea of any form of state regulation, warning that it would be a threat to press freedom.
Appearing before the Commons Culture, Media and Sport Committee, Ms Bradley acknowledged that the majority of newspapers were not prepared to consider applying for recognition under the PRP, which was established by a royal charter.
While she said she had not ruled out activating Section 40 at some point in the future, she wanted to consider the options for achieving "appropriate levels of robust regulation... outside the PRP".
She told MPs that there were fears among local newspapers in particular that they could be forced out of business if the Government took an overly "ideological" approach to the issue.
"In 2013 when we debated and passed the Act it was a different situation. We expected and hoped that the press would join regulators that applied for recognition under the PRP. That simply has not happened," she said.
"I could do an ideological position on this but the implications of being ideological on this may be that we see a vibrant free local press being affected.
"It has been put to me very clearly by a number of editors of local newspapers that the exemplary damages section of Section 40 could see them being put out of business and certainly would impact on their ability to do investigative journalism.
"I want to consider those representations, consider them very carefully, and then make a determination. I am reserving judgment at this stage until I have had a chance to consider all the options."
Newspaper organisations say they are being "blackmailed" into joining a Government-backed regulator, as those that do so would be exempt from such laws.
The industry has warned that press freedom is in peril, and called on Prime Minister Theresa May to refuse to implement section 40.
The Sunday Times said it would allow an "open season for press complainants", adding: "The Prime Minister can prevent this by refusing to agree to implement section 40. She must do so."
The Sun said: "Signing up to Impress would mean granting the state an indirect hand in what the once-free press could publish, when it is the primary job of the press to hold those in power to account."
Media commentator Matthew Parris wrote in The Times and Daily Mail: "This is blackmail with a purpose. The threat of ruin is to act as an electric prod that forces every paper to submit - 'voluntarily' - to state regulation."
Bob Satchwell, executive director of the Society of Editors, said the royal charter system is "halfway to state control of the press" and called section 40 a "draconian measure".
He told the Press Association: "It goes against all the principles of justice. The first principle of any justice system is that it should be fair.
"Well, it's clearly unfair if somebody who takes action against a paper, the paper is found to have got the story right and the person who sued is totally wrong and may indeed have lied, he wouldn't face any costs because the paper would have to pay it. It's a nonsense."
Mr Satchwell added: "The idea that the royal charter system and the recognition panel really meets what Leveson was trying to achieve is clearly wide of the mark.
"I think that's the point the Secretary of State was making when she said she's looking at the situation, because she wants to see robust, voluntary, independent self-regulation of the press.
"That's what the industry wants and that's what the industry has done."