Dan Jarvis has been told he will be able to remain an MP if he is elected as Sheffield City Region mayor.
Labour’s National Executive Committee ruled last week that no-one could serve in two elected roles.
A Labour source revealed both parties had now agreed the Barnsley Central MP would be able to remain in parliament.
Mr Jarvis said: “I am honoured to be Labour’s candidate for the Sheffield City Region mayoral election and I am looking forward to the campaign.”
Following Labour’s National Executive Committee ruling, party general secretary Iain McNicol and incoming general secretary Jennie Formby outlined its position in a letter to Mr Jarvis.
The Yorkshire and Humber Parliamentary Labour Group, with 36 MPs, had backed Mr Jarvis, saying he was selected in the “full knowledge” he would do both jobs.
Mr Jarvis is the favourite to win the May 3 contest as all 14 South Yorkshire constituencies taking part in the election were won by Labour at the last general election.
The elected role will cover Barnsley, Doncaster, Rotherham and Sheffield councils. Anybody registered to vote in these areas will be eligible to vote for the new mayor.
Analysis by James Vincent, BBC Yorkshire political editor
In the end, Labour couldn’t really do anything else.
They had to endorse Dan Jarvis as their candidate and concede that this is an exceptional election.
Had they enforced their one elected role rule – they would have had a host of local MPs exercising their thumbs in a series of terse, ticked off tweets. That wouldn’t do just before an election.
So Dan Jarvis can do both jobs. That hasn’t gone down well with everyone, but it’s how he pitched for the job in the first place.
Official nominations come out on Friday so we’ll know exactly where we stand. But the choice for voters isn’t just on party lines, it’s also about what sort of devolution should happen in the future.
Stick with just money and power for South Yorkshire? Or twist and try and widen that deal to the whole of Yorkshire?
The four-year mayoral post has been controversial because, unlike similar roles in Manchester and the West Midlands, no devolution and funding deal has yet been agreed.
The full list of candidates for the election is to be revealed on Friday afternoon after nominations have closed, said the Sheffield City Region.