Under the compromise plan, Muslim community agreed to shift its new mosque at Colombo north's Grandpass area to an older place. While the Buddhists agreed to cut down a Bo tree (banyan) sacred to them.
The Muslims had claimed the large tree had hampered the mosque at its older site which forced them to relocate.
"As part of the compromise we have agreed to go back to the old site," said N M Ameen, head of the Sri Lanka Muslim Council.
On Saturday, a mob led by the head of the local Buddhist temple attacked the prayer site injuring some 12 people and forcing a police curfew in the area for two consecutive nights.
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The attack on the Muslim prayer site was part of a campaign carried out by Buddhist extremist groups since early part of this year.
They fear an expansion of Muslim extremism through places of Islamic prayer sites which they say were mushrooming in different parts of the Buddhist majority island.
The Saturday's attack drew a response from the US who urged action to bring the culprits to book and to ensure the freedom of religion.