This story has been clarified, please see final paragraph for details.
The Charity Commission today said it would not prevent charities from offering grants that cover core costs or overheads to non-charitable organisations.
The commission was criticised last year when it published draft guidance that appeared to forbid the practice.
The Association of Charitable Foundations, the National Council for Voluntary Organisations and the Charity Finance Group said at the time that the guidance risked fettering the discretion of trustees and threatened the growth of social-purpose organisations, such as social enterprises and NGOs.
The three organisations accused the commission of trying to "draw tight boundaries around how grants may be used to cover the running costs of organisations that are not charities".
The regulator’s new updated guidance, published today after consultation, is significantly different.
It says charities "can grant-fund the support costs of activities, services or outcomes delivered by another organisation that is not a charity, provided these are intended only to further the charity’s own purposes".
Carol Mack, chief executive of the ACF, said it was grateful to the commission for engaging with the sector and "addressing the points we raised during the consultation period".
Mack added: "It’s really important to recognise that grant-making to organisations that are not charities, such as social enterprises and community groups, can be a highly effective way for charities to achieve their aims."
The commission promised to release guidance after a High Court case was brought against it by the advocacy group Cage.
The regulator had asked the Joseph Rowntree Charitable Trust and the Roddick Foundation to agree not to fund Cage any more after it emerged that Cage had once been in contact with Mohammed Emwazi, the Islamic State militant and British citizen nicknamed Jihadi John. It described him as having been a "beautiful young man" and blamed MI5 for his radicalisation.
Elizabeth Chamberlain, head of policy and public services at the NCVO, said: "It's good to see that the commission has learnt from the Cage case and used it as an opportunity to provide trustees with guidance on what can sometimes be a challenging decision."
Chamberlain said the guidance "allows freedom for trustees to make decisions based on their own judgement". But she added: "There’s a bit of a risk that this positive message could be lost because the guidance is quite long and legalistic, which could in itself send the message that this sort of funding is risky or not encouraged."
Jane Hobson, head of guidance and practice at the commission, said: "Our updated guidance makes it clear that making grants to organisations that are not themselves charities can be an effective way for a charity to fulfil its purposes and meet the needs of those it exists to help.
"There will always be limits and conditions on what a charity can fund, however, and our guidance helps trustees ensure that they consider the relevant risks and boundaries when making such decisions."
This headline of this story originally read "Commission won't try to stop charities offering core grants to non-charities". This has since been changed along with the first two paragraphs for clarification.