This is an odd ruling because the organizers -- the "Sexual Independence" movement -- don't want to hold the festival in a public space.
Their proposed "Queer Without Fear" gathering shouldn't be confused with for a sexually charged parade with guys in codpieces marching through the city.
This is a country where gay ex-American Idol contestant Adam Lambert's concert two years ago compelled protesters to wave signs reading "IT'S NOT OUR CULTURE!"
Even a mild gay rights march through the capital, Kuala Lumpur, might genuinely disrupt "public order" -- or at least draw furious conservatives and whip up tension.
But this annual festival -- which hummed along fine for several years before it was politicized -- is an indoor exhibiton with no nudity held within the confines of an art gallery.
Listening to one of the chief organizers, Pang Khee Teik, you get the feeling that government interference is bringing Malaysia's gay community to a breaking point.
"The situation has become untenable," he told BFM 89.9, a Malaysian radio station. The movement isn't asking the public to embrace homosexuality, he said, and it's not trying to "shove it in peoples' faces."
They just want to exist.
"We've been pushed around and made to be afraid everyday. That we'll be exposed for who we are. We go to work every day frightened that we'll lose our jobs," he told BFM Radio. "All these fears cripple our lives ... and it wastes so much energy."
Under Malaysia's sodomy law, consensual same-sex couplings are "against the order of nature" and can be punished with 20-year prison sentences.