Mardis Gras organisers and NSW Police have reached an agreement to allow officers to march out of uniform in the upcoming parade.
Urgent talks have been under way since the invitation to police to march was withdrawn following the alleged murder of a Sydney gay couple by a serving officer.
NSW Police Commissioner Karen Webb has met with organisers multiple times after the Mardi Gras board made its decision on Monday night.
In a statement on Wednesday, Ms Webb confirmed NSW Police would be allowed to march.
"Police have agreed not to march in uniform, in consideration of current sensitivities," she said.
"The Sydney Gay and Lesbian Mardi Gras is an important event on the NSW Police calendar and as commissioner, I am committed to continuing to strengthen the relationship between my organisation and the LGBTQIA-plus community."
Peter Murphy, who was part of the 1978 march which ended in dozens of people being arrested and charged, was relieved the board's decision had been reversed.
"I was in two minds about going to the parade because of this debate, but feel enormous relief," he told AAP.
"The police officers who do march will be welcomed by everyone, I don't think they should have been excluded."
Mr Murphy said police who participated in the parade each year were part of the LGBTQI community or were allies, and their presence was about pushing for cultural change in workplaces where there was still discrimination.
"We created the Gay and Lesbian Mardi Gras parade in 1978 to give public space to include everyone," he said.
Police Minister Yasmin Catley was pleased a compromise between police and parade organisers could be reached.
"At the end of the day, we didn't want a broken tradition," Ms Cately told Sydney radio 2GB.
"The police have been marching for 20 years, and it really has gone a long way to help their relationship (with the LGBTQI community) and we didn't want to break that."
The parade runs through Oxford Street in Darlinghurst in the city's inner east on Saturday.
Debate over police participation in the Mardi Gras parade has intensified since the arrest of Senior Constable Beau Lamarre-Condon, 28, over the alleged murders of Jesse Baird, 26, and his boyfriend Luke Davies, 29.
The killings allegedly occurred at Mr Baird's home in inner-city Paddington, not far from where the parade will take place.
Lamarre-Condon previously marched in the parade with the NSW Police contingent.
Australian Federal Police officers have decided not to march, abandoning plans to join their NSW counterparts.
"This decision was not taken lightly, but we acknowledge how some in the community are feeling about the blue uniform," an AFP spokesperson said in a statement.
Pride in Protest spokeswoman Charlie Murphy described police marching at Mardi Gras as "salt on open wounds".
Prime Minister Anthony Albanese and Premier Chris Minns have both backed police marching in the parade, as has independent state MP Alex Greenwich, whose electorate includes the Oxford St precinct where the event will take place.
Both leaders are expected to join the parade on Saturday.
Mr Greenwich said the focus must shift to what support, funding and resources the LGBTQI community need from the state government and police to improve their wellbeing.
"Having the focus on gay and lesbian liaison police officers, and not in uniform, is an appropriate compromise to address community concerns about the police needing to improve their approach to the LGBTQ community and our events," he said.
