NSW Police Commissioner Mal Lanyon announced the decision on Tuesday, less than six weeks after the December 14 terror attack prompted fears about public cohesion and safety.
"This is about making sure we enable people to protest, enable free speech, but make sure the community remains safe," he said.
The affected area has been significantly pared back from most of Sydney's metropolitan area.
It now encompasses Darling Harbour, the northern city centre excluding Hyde Park and the eastern suburbs.
That will mean the city's annual Invasion Day rallies can continue, meaning protesters will be able to rally as planned on January 26.
Protesters plan to march through the city's south from Hyde Park as they raise their voices on issues like the gap between Indigenous and non-Indigenous health outcomes, deaths in custody and systemic racism.
"We're not here to cause any harm to the police or anyone in society," Blak Caucus member Elizabeth Jarrett told AAP ahead of the decision.
"The police should respectfully stand aside and let us march."
Although the declaration does not explicitly ban protests, it prevents organisers from gaining authorisation that shields them from arrest for obstructing traffic or pedestrians.
Protesters can also be issued a move-on direction, even if they participate in a static demonstration.
The power to make these declarations was controversially given to the commissioner in laws rushed through parliament after the Bondi terror attack, when two gunmen opened fire and killed 15 people.
A national day of mourning has been announced by the federal government to remember the victims and is set to take place on Thursday.
Ms Jarrett, a Gumbaynggirr, Bundjalung, and Dunghutti woman, had urged the state to allow First Nations people to mark their own day of grief.
"How good of a police department are you going to be if you're going to stand against sovereign people and their allies, and threaten mass arrest on our national day of mourning that's been held since 1938?" she said.
Protests have taken place since the restrictions were imposed, including a rally on Indigenous deaths in custody.
During the event, police issued a move-on direction as organisers suggested participants cross the road in smaller groups to ensure they did not block the streets.
Though many disagreed with the orders, the protest's organiser urged attendees to comply for their own safety.
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