The move follows a Supreme Court decision that banned electoral blocs and required all parties to run individually beginning with the Oct. 20 elections.
But many legislators were opposed to this because some small municipalities are not ready to switch from electoral blocs to party lists.
The ruling Reform and Center parties backed the decision.
"The Center Party and the Reform Party have arrived at a common position that participation of electoral alliances in the election of local self-government councils this fall is a goodwill compromise balancing the society," the ruling parties said in a joint statement.
Electoral blocs allow citizens to draw up lists of candidates. Because electoral blocs are not associated with the national political parties, leaders from these alliances may more easily get away with corruption and poor decisions, said Peep Lillaemage, a spokesman for the Reform Party.
Allied members of the electoral blocs may make decisions according only to their own interests, Lillaemage said.
"When someone from a party does something it's all over the newspapers," Lillaemage said. "People from parties must be responsible about decisions because it affects the whole party."
Members of the Moderates, one of Estonia's opposition parties, said they were glad the ruling parties decided to lift the ban on electoral blocs.
"The two-party coalition realized that any other option but allowing electoral alliances to run again in local elections would have failed at the extraordinary session of the Parliament," Moderate lawmaker Eiki Nestor told the Baltic News Service.
"What's most important, it now looks that the election will take place Oct. 20 and the legitimacy of the outcome won't have to be established in court."
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