The club has been surrounded in controversy since a film appeared on the internet of two boys wrestling in front of a baying adult audience at Greenlands Labour Club in Preston in September. The children were fighting without protective headgear and one was seen crying.
The council has allowed the club to keep its licence subject to a new rule that it must give 21 days notice of any event involving children under 10.
The council's deputy leader, John Swindells, a member of the licensing authority who called for the review of the club's licence, said he was "appalled" by the footage and was concerned about the potential for harm to the children.
Greenlands club owner Michelle Anderson said after the meeting: "We are very pleased with this decision.
"They have confirmed that we can hold similar events in the near future which promote healthy sporting events in the city."
She said: "The children were not doing cage fighting, they were just grappling. There was no punching, kicking or striking.
"The event was perfectly legal. There was only one fight for kids, which was a demonstration fight. The other fights were for adults."
Lancashire Police said they had looked into the "mixed martial arts event" and found no laws had been broken so it was not subject to a criminal investigation.
Authorities and interested parties were invited to send in representations for the council hearing. There was no feedback from authorities but the council received 18 letters in support of the club , many from other sporting organisations which use it regularly.
At the time Culture Secretary Jeremy Hunt described the video as "very barbaric".
See the video here and tell us what you think.