We present prototype studies of a new technical solution of detector readout for measurements of charged particles at very high particle densities. In particular, this paper describes a readout system for Multi-Step Avalanche Chambers designed for the WA98 experiment at the CERN SPS. Results from the prototype studies are used for the design parameters of a readout chip containing both analog and digital functions. Simulations of the final system show that the position of the electron cloud can be reconstructed for single particles to an accuracy of 100 and 300 μm in the horizontal and vertical directions, respectively. Separation of two tracks about 5 mm apart is also obtained from the simulation.