The post of chief coroner will no longer be abolished following opposition from groups including the Royal British Legion.
The government had chosen to scrap the position, which was created in 2009 but has never been filled.
But the Legion argued a chief coroner was needed to improve the handling of inquiries into military deaths.
Justice Secretary Ken Clarke said he had "listened and reflected on the concerns".
The row had threatened to derail the government's Public Bodies Bill, which comes to the House of Lords on Wednesday.
BBC political correspondent Vicki Young said several members of the military top brass were lining up to speak in the Lords against the abolition of coroner, so there was the possibility that the bill could have been defeated.
But she said Mr Clarke had not given in completely and was not proposing to give the chief coroner the power to hear appeals from people unhappy at an inquest verdict.
This is something the Royal British Legion has campaigned for, and therefore, it may still be dissatisfied with the government's compromise.
The office of the chief coroner was established under Labour in November 2009, amid warnings the service provided by coroners across the country was inconsistent.
The chief coroner was to head a new national coroner service for England and Wales, reporting to the Lord Chancellor.
But the appointment of anyone to the role was postponed and in 2010 Mr Clarke ordered a review into the "scope and timing" of the implementation of the new law, as part of government spending reviews.
The government subsequently decided to scrap it altogether to save money, but in June it rowed back somewhat, announcing that it would keep the office on the statute book but transfer its powers elsewhere, including to the Lord Chief Justice.
One of the powers that would have lapsed was the chief coroner's proposed monitoring of investigations into service deaths.
This prompted an angry response from the Legion and others who said it would prevent vital reform of the system needed to speed up the inquest process, which sometimes leaves bereaved relatives waiting years for answers.
In a statement on Tuesday, the justice secretary said: "Over recent months I have listened to and reflected on the concerns raised across Parliament, by families and by other groups, including the Royal British Legion, that a single figure needs to be responsible for the coroner system.
"I am prepared to have one last try to meet those arguments and so have taken the decision to implement the office of the chief coroner.
"The existing mechanisms for challenging a coroner's decision will remain in place and will avoid the need for expensive new appeal rights.
"The new post will be focused on working to deliver the reform to coroners' services that we all want to see and which I previously argued should be delivered by the Lord Chief Justice and myself."
Mr Clarke said the priority was to drive up inquest standards and the chief coroner would be given "the full range of powers" needed to do that, including setting minimum standards of service.
Jim Murphy, Labour's shadow defence secretary, said the government had been "forced into a climbdown".
"The post of chief coroner will create an independent and expert coronial system for all bereaved families and will help drive up standards. The detail of this decision is very important and we will want to see specifics.
"The Royal British Legion deserve huge praise for a brilliant campaign."