Carinthia said it was willing to buy back €11 billion ($12 billion) of bonds issued by the now defunct Hypo Group Alpe Adria (HGAA) at 75 percent of their face value.
In other words, the state is asking creditors to accept €3.2 billion in losses.
Several bondholders, including Germany's Commerzbank and the French-Belgian Dexia group, have in the past said they would refuse any reduction in their claims, known as a "haircut", and even challenge the matter in court.
A rejection could potentially bankrupt Carinthia, a small state of 500,000 inhabitants already saddled with €4.8 billion worth of debt.
K-AF, a special public trust set up by Carinthia, said in a statement it would submit an official offer on Thursday to creditors of "bad bank" Heta Asset Resolution, the wind-down unit for HGAA.
The bid, which stands until March 11, needs to be accepted by at least two-thirds of the creditors.
"I believe it's an attractive offer," Austrian Finance Minister Hans-Jörg Schelling said on Wednesday on the sidelines of a conference in Vienna.
The saga is a legacy of the late far-right politician Jörg Haider, formerly premier of Carinthia, who died in 2008.
Under Haider, HGAA expanded into the Balkans as well as Italy and Germany via acquisitions and risky investments, expanding its balance sheet fourfold to some €40 billion.
Bavaria's state lender BayernLB bought a majority stake in 2007 in HGAA but two years later, as the global financial crisis raged, the bank came close to collapse and Austria nationalised it.
After a bitter and long dispute, Austria finally agreed last November to pay Bavaria €1.23 billion to put an end to the feud.