The Crystal Palace track has not hosted a major athletics event since August 1997, but UK Athletics has chosen to return in order to persuade the International Amateur Athletic Federation that it deserves Golden League status for its Grand Prix.
The shift will also strengthen British hopes of attracting the 2003 World Championships.
Birmingham and Manchester have both spent millions of pounds in unsuccessful Olympic bids. The IAAF's president, Primo Nebiolo, has made it clear that top British athletics events need to be in London.
Last month Nebiolo met with David Moorcroft and David Hemery, respectively chief executive and president of UK Athletics and reversed his earlier decision to relegate Britain's main meetings' top Grand Prix II status.
Nebiolo's decision, according to a spokesman for Fast Track, the commercial arm of UK Athletics, was not dependent upon the switch to London.
Sport England has made a financial commitment to tidy up the Crystal Palace venue ahead of the Grand Prix on August 7.
"We are delighted to be back in the capital city and hope these efforts culminate ultimately in a World Athletics Championships in London."
The response in Sheffield, which staged the 1997 and 1998 Grand Prix I meeting, was less enthusiastic.
"It is very sad and a shame that Sheffield is losing out to the capital in this manner," said Sheffield city councillor Peter Price, a key figure in the building of the Don Valley stadium.Reuse content