Jerry Bloom sued Shelton in the US state of Connecticut after officials refused to allow him to display the banner at a park in the city.
Bloom, who was being supported by the Wisconsin-based Freedom From Religion Foundation (FFRF), says he now plans to drop the lawsuit after a u-turn saw the poster allowed.
Quoting Anne Nicol Gaylor, the FFRF's founder, it reads: "At this season of the Winter Solstice, may reason prevail.
"There are no gods, no devils, no angels, no heaven or hell.
"There is only our natural world.
"Religion is but myth and superstition that hardens hearts and enslaves minds."
Bloom had claimed if the Nativity set on Huntington Green - set up by the American Legion - was allowed, so should his display.
Bloom was quoted by the Independent Valley Sentinel as saying: "People were walking by, driving by.
"There was no negative feedback from it.
"There's a lot of closet atheists out there."
Meanwhile, the mayor of Shelton Mark Lauretti, was quoted by the news website as saying: "We're treating him (Bloom) the same way we treat everybody else.
"When you treat people the same way and you have a level playing field, is that not the Christian thing to do?
"It doesn't necessarily mean their views reflect mine and mine reflect theirs."