The Tamil Nadu government had banned Hassan's film "Vishwaroopam" in the state following protests from several Muslim groups objecting to the film's portrayal of Islam.
Hassan and Muslim leaders reached an agreement Saturday after more than five hours of talks.
Islamic groups have promised to call off their protests against the film and withdraw legal cases that they have filed against the filmmaker.
Hassan is the producer, director and star of the film, which was released abroad and in some Indian states on Jan. 25. The film has received a tremendous response in states where it has been released and has earned favorable reviews from film critics.
The film has been made in the Tamil, Telugu and Hindi languages.
It had been cleared by India's Censor Board before the Muslim groups raised objections to some scenes prompting the Tamil Nadu government's ban. That decision was followed by similar bans on the film in Sri Lanka and Malaysia.
The film is expected to be released in Tamil Nadu as early as Friday.