The Shadow Cabinet has decided Labour MPs will have a free vote on the controversial issue when the five-yearly Armed Forces Bill reaches its report stage on 9 May.
The leadership will face a dilemma over whether the free vote should apply to members of the Shadow Cabinet or whether they should hold a common line.
There is strong support for lifting the ban at many levels of the Labour Party, including some Labour members of the select committee that has examined the issue. If Mr Blair does not support lifting the ban then it is certain to cause dismay among some of his backbenchers.
Labour strategists are conscious of the difficulties faced by President Bill Clinton early in his first term when he sought to legislate to remove a similar ban in the US military.
No final decisions have yet been taken on the leadership stance but there is speculation that Mr Blair is unlikely to run counter to the hostility of the armed services chiefs to lifting the ban. Support for overturning the ban could be seen as tantamount to a moral commitment to do away with it if Labour wins the general election.
The main parties are also conscious that the Government after the next election may have to reconsider the ban in the light of a European Court of Human Rights' decision on four complaints of discrimination by gay British servicemen.
The Tory-dominated Special Select Committee which has been considering the Bill will report on 7 May and is expected to recommend that the ban remains in force. Nicholas Soames, the Minister for the Armed Forces, is a member of the committee and has made clear the Government's opposition to lifting the ban.
However, the committee may recommend the easing of some of the ban's harshest restrictions. It may, for example, recommend a right for gay servicemen to confide privately in Army chaplains and counsellors, in total confidentiality.Reuse content