The Minister for Arts has indicated that tax incentives for the Irish film industry may be retained in a revised format.
Mr O'Donoghue is in talks with the Minister for Finance, Mr McCreevy, following the completion of a PricewaterhouseCoopers analysis of the economic significance of the "Section 481" tax relief scheme.
At the last Budget, Mr McCreevy announced the scrapping of the tax relief from the end of 2004, and Mr O'Donoghue agreed that as currently constituted Section 481 was open to abuse and had been abused in the past.
In the interests of taxpayers, the Minister said, a situation could not be tolerated where a tax relief could be abused by a minority.
As a result he was bringing forward concrete proposals to the Minister for Finance to show him that Section 481 could be continued, and at the same time the opportunity for abuse of the system could be eliminated to the greatest possible degree.
Mr O'Donoghue said: "It is my fear that, if Section 481 goes, we will not be in a position to attract the type of films we have been able to attract in the past", and this would have serious consequences for those in the film industry and for Ireland's overall image.
The Irish film and TV drama industry employs 4,300 people and claims that up to 80 per cent of production work could stop immediately if the relief is withdrawn.
Mr O'Donoghue refused this week in the Dáil to divulge the contents of the PWC analysis until the discussions with Mr McCreevy.
"I hope we can achieve a fair balance," Mr O'Donoghue said, "on the one hand addressing the concerns of the Minister for Finance, and on the other retaining a system which will attract film-makers to Ireland, assisting the film industry and the country's general image into the future".
The issue has been raised a number of times since the Dáil resumed after the summer, as concern grows about potential job losses in the industry if the tax goes.
According to the Minister of State for Finance, Mr Tom Parlon, in the past 10 years the Exchequer has forgone €265 million as a result of film tax relief.
