Many local authorities have had prayers at the start of their deliberations for years but it was found to be unlawful in 2012.
The coalition introduced a 'general power of competence' allowing the practice to continue and have now passed a bill to put it on a statutory footing.
But the unelected peer had moved to block the bill from becoming law, before removing his objection.
The Earl of Clancarty, a cross bench peer, proposed an amendment to the bill which would have meant the proposal would not have enough time to pass parliament before the election.
His change would have limited the right of councils to hold religious prayers at the start of their meeting.
"This Bill is or ought to be part of something larger which is the place of religion in society and indeed the place of religion in the workplace," he told a House of Lords' committee.
"One of my concerns about this is the place where it came from. Why has there felt the need for this Bill in the first place? That is the question to be asked of anyone who says this is a modest measure.
"Councillors are not elected for their religious beliefs, they are elected for what they are pledged to do for the local area and for their political affiliations.
"If we are to have this Bill in the interests of what should be in my view scrupulous impartiality of councillors towards all beliefs and non-beliefs, a better compromise solution would be silent prayer.
"I do not believe necessarily in tradition for its own sake. The fact a council has been saying prayers as part of official business for hundreds of years does not mean to say it should be saying prayers for the next few hundred if that is an inappropriate practice in the modern age. I stress we now live in a multi belief and non-belief culture."
In response the Bishop of Leicester joked he should declare an interest, because he earlier led prayers in the House.
"What concerns me from Lord Clancarty's opening remarks is the assumption that in a multi-religious and secular society it is in the interests of all the religions to evacuate the public space of any religion," he said.
"That is not my experience in Leicester at all, which is one of the most multi-religious cities in this country."
The Earl of Clancarty was forced to drop his objection and the Bill will now proceed to report stage in the Lords.