The City of Sydney Council this month voted five-to-four for the special designation for parts of the city favoured by gays and lesbians to deter violence, abuse and harassment against homosexuals.
The plan, which stemmed from consultation with members of the gay and lesbian community, could encourage local businesses to use stickers and other signs to declare their support for the gay community, The Australian said.
The council could also consider revoking late-night trading privileges for venues whose patrons commit homophobic attacks, it said.
But rebel councillors believe the plan could backfire and lead to more attacks on homosexuals.
"The young men who come in from outer suburbs to drink alcohol and assault gay people are not going to be deterred by a sticker in a window," said councillor Shayne Mallard.
"Because they already have homophobic and violent tendencies, it's more likely to be a provocation," he told The Australian newspaper.
"Lots of people in the gay and lesbian community fear it will provoke more violence... we've had enough of these PR stunts."
Lord Mayor Clover Moore, who backed the proposal, said while all areas of Sydney were technically homophobia-free zones, the new strategy recognised the importance and strength of the city's gay, lesbian and bisexual community.
"If people get away with homophobic abuse, there is a strong risk that they move on to physical abuse and violence," she said in a statement. "We must stop it before it gets to that stage."
A council spokesman said the city had already placed CCTV cameras along Oxford Street, the focus of the annual gay and lesbian mardi gras and a noted bar and nightclub strip, and offered self-defence classes to locals.
The AIDS Council of New South Wales, which will help the council develop the idea, said no final decisions had been taken on how to implement the strategy.
"The plan is still in the very early stages of policy development," a spokesman said.