Diplomats said Iran's change of heart came after Canada announced it was recalling its ambassador from Tehran in protest at being denied access to the proceedings, which resumed on Saturday.
They said diplomats from the embassies of Canada, Britain and the Netherlands, current holder of the European Union presidency, had been given the green light to enter the courtroom.
The presence of several diplomats at the courtroom was confirmed by a number of journalists.
Iran does not recognise dual nationality and has shrugged off pressure from Ottawa by insisting the trial is a "domestic affair".
Foreign Ministry spokesman Hamid Reza Asefi said the trial was an Iranian internal issue and it would handle the case "based on its own regulations".
"The request for the presence of Canadian observers is contrary to all international principles and regulations and is unacceptable," Asefi said on state television.
Canadian Foreign Minister Bill Graham was quoted on Tuesday as saying Ottawa could take measures ranging from economic and trade sanctions to suspension of high-level diplomatic ties if it was dissatisfied with Iran's handling of the case.
"We do consider this extremely important ... There are no impediments to us taking actions," The Toronto Star newspaper quoted Graham as saying in an interview.
"The request for the presence of Canadian observers is contrary to all international principles and regulations and is unacceptable"
Hamid Reza Asefi,
Iranian Foreign Ministry spokesman
Iranian intelligence agent Mohammad Reza Aghdam Ahmadi, 42, faces the charge of "semi-intentional murder", more than a year after Kazemi died from injuries sustained while in the custody of authorities in Tehran.
Zahra Kazemi's was arrested for taking photographs outside the Evin prison in Tehran and died while in custody last July.
Iran's judiciary initially said Kazemi died of a stroke. But a presidential inquiry revealed that she died of a brain haemorrhage caused by a heavy blow.
The case has resulted in fresh scrutiny of Iran’s human rights record, and badly damaged relations with Canada.
Kazemi's family will be represented at the trial by 2003 Nobel Peace Prize winner and human rights lawyer Shirin Ebadi.