The 29-year-old, who won a 4x400m relay silver at the Athens Olympics in 2004, had angrily threatened to pull out of the Games over the weekend after discovering teenager Steve Solomon had been nominated to run in the individual event in London.
Steffensen, who has aboriginal heritage, beat Solomon in the Australian Olympic trials but neither runner had run the "A" qualifying time and both were therefore relying on a nomination from AA to run in the 400m.
Speaking to Channel Nine television from Paris on Monday, Steffensen said that, after the intervention of the Australian Olympic Committee (AOC), both runners would now be considered for the AA nomination.
"Whoever runs, whether it's Steve or myself, I think it will be great for our country," he said.
AA chief executive Dallas O'Brien later denied there had been a policy U-turn.
"I think there might have been a misunderstanding somewhere because it was very clear Steve Solomon, our 19-year-old rising star, was the only entry but the AOC have nominated John Steffensen as a reserve," he told Fox Sports TV.
"So it does keep that open in case something happens to Steve Solomon. But it is very clear at the moment that Steve is the first and only choice from Athletics Australia selectors."
Steffensen, the 2006 Commonwealth games 400m champion, has clashed with AA in the past and declined to defend his title at the 2010 Commonwealths in Delhi over a series of grievances.
His latest blast at AA on the same television programme over the weekend included the accusation of racism.
"I've put up with being racially vilified by this federation, being discriminated against on many teams," he said, later adding: "You know it would help if I was a different colour. A lot of my decisions with my federation would be totally different."
O'Brien said the allegations were unfounded.
"There was only one person who could be selected and it was taken on current form," he said.
"I said to John on Saturday morning he's being irrational. As far as previous allegations go, I am certainly not aware. There has been no proof of specific allegations." (Reporting by Nick Mulvenney; Editing by John O'Brien)