Five piece rock band Massive Wagons commissioned the mural to be painted on the side of The Pub, in China Street, earlier this month, to help promote their new album Full Nelson, which is out in August.
The mural has drawn praise from locals and visitors to the city, but Lancaster City Council says the mural is an advertisement, and is therefore illegal without the proper consent.
The council had written to the owners of The Pub asking them to remove it by July 30.
A petition was then launched, so far garnering more than 6,000 signatures, urging the council to leave the mural in place.
Since then, the band has said it would work with the city council to try and resolve the issue, and Lancaster City Council has now agreed to leave the mural in place.
A spokesperson said: “We are working with The Pub and Massive Wagons to try and resolve this issue and we are offering them guidance on the possibility of applying for retrospective planning permission.
“Lancaster City Council has agreed to leave the mural in the meantime, and we are hopeful that our discussions will achieve a positive outcome for all parties.”
Barry Mills, lead singer of Massive Wagons said: “We would like to let everyone know that we fully intend to work with Lancaster City Council and The Pub to keep the mural that everyone has grown to love!
“It was not anyone’s intention to break any legislations here and we are fully prepared to do whatever is needed.
“The council have started talks with The Pub who own the land to advise on what happens next.
“We are absolutely blown away by everyone’s support and we hope we can win the council over!
“We have fought long and hard to get our music heard. The mural for us, is a celebration of what can be achieved.
“We are so proud of our city and we want other young musicians from Lancaster to draw inspiration from it.”
The band says it is hoping to get their new album, out on August 10, into the Top 40 album charts.
They would be the first band from Lancaster to get into the Top 40.