The original ban sparked a protest last week after it emerged only the Union flag could fly over Hampden Park in Glasgow during the Games because Scots athletes compete for Great Britain.
The rules were even interpreted as banning Scottish fans from flying their national flag from the stands, although this was rejected by the organisers.
Alyn Smith, a Scottish Euro MP, complained last week to Lord Coe, chairman of the organising committee.
“This move shows common sense by the organisers and is wholeheartedly welcome. It shows they are prepared to listen and that is something to be commended,” said Mr Smith.