Members of Hackney Labour were told to cease campaigning for Laura Pascal over the weekend following allegations of transphobia.
Ms Pascal is standing in the closely contested Cazenove ward by-election due take place on Thursday, January 18.
Earlier this week the Labour party said she would have sat as an independent councillor if she won the vote.
But on Wednesday evening it was confirmed Ms Pascal's suspension had been lifted following an investigation.
Ms Pascal said: “I offer a heartfelt apology to the people of Cazenove ward, Hackney and anyone who has been offended by my social media activity, which fell well below the standard expected of someone seeking election to public office.
"It was a mistake to like some tweets that caused offence and a great deal of hurt.
"Ultimately, the people of Cazenove ward will make their own judgements on Thursday, but I hope they can find some reassurance in the fact that I have reflected deeply on my past social media activity and offer this apology unreservedly.”
The accusations related to comments Ms Pascal made on social media.
In July she tweeted that "trans women are not female. By definition they are male."
It is understood that another complaint relates to alleged racism after Ms Pascal appeared to "like" a post which suggested a trans woman were wearing "womanface" and it was comparable to blackface makeup
But one Labour source branded the suspension "ridiculous", adding "Laura is a feminist and certainly not a racist".