The decision was made as early voting began on a proposed amendment to the Texas constitution to ban gay marriage.
The KKK rally will be held November 5 on the south plaza of Austin City Hall.
In seeking permission for the protest, called a "pro-family" rally, the American White Knights of the Ku Klux Klan said: "Our speech will not be inflammatory, but we all know the reputation of the name of the KKK, so we expect anti-Klan demonstrators to be there who may become violent. We certainly don't want any of our people hurt nor any city officials. We just want to come and encourage people to vote for Christian Family Values and against legalized homosexual marriage in the state of Texas."
Voters will go to the polls November 8, three days after the Klan rally, to cast ballots on the gay marriage ban, that would also bar civil unions.