The Sydney Morning Herald reports that the ban was lifted after upper house MPs last night supported the controversial bill by 28 votes to 13.
The NSW legislation mirrors a law passed by Federal Parliament in December and is similar to a bill passed by Victoria's Parliament in May.
The Archbishop of Sydney, Cardinal George Pell, reignited debate about the separation of church and state after he warned Catholic MPs who supported the bill that they "must realise that their voting has consequences for their place in the life of the church".
Despite the warning, a number of high-profile Catholic MPs, including the Premier, Morris Iemma, and his deputy, John Watkins, voted in favour of the bill in the Legislative Assembly.
Mr Iemma said he did not believe Cardinal Pell had overstepped the mark.
The Attorney-General, John Hatzistergos, a Catholic, abstained from voting last night. Four cabinet members, Kristina Keneally, Graham West, Kevin Greene and Barbara Perry, voted against it in the lower house.
The law also passes despite Christian Democrat MPs Fred Nile and Gordon Moyes making an "urgent call to prayer" ahead of the vote.
Stem cell ban lifted (Sydney Morning Herald, 27/6/07)
Call for prayers to beat stem cell bill (The Age, 25/6/07)
LINKS (not necessarily endorsed by Church Resources)
Parliament of NSW
Archdiocese of Sydney
Stem cells (Wikipedia)
Christian Democratic Party, Fred Nile Group
Bush vetoes US stem cell legislation (CathNews, 22/6/07)
Don't whinge over Church doctrine, NSW MP tells colleagues (CathNews, 21/6/07)
Don't privatise religion: Christian thinktank (CathNews, 19/6/07)
Pell slams "stalinist" parliamentary contempt probe (CathNews, 18/6/07)
WA speaker raps Hickey (CathNews, 15/6/07)
Pell sticks to stem cell guns (CathNews, 12/6/07)
WA parliament may reprimand Hickey (CathNews, 8/6/07)
Anglicans, Baptists back Pell (CathNews, 8/6/07)
Coast to coast controversy over stem cell vote (CathNews, 7/6/07)
Catholic pols defy stem cell communion threat (CathNews, 6/6/07)
Pell slams "open slather" for stem cell research (CathNews, 5/6/07)
Life office slams human "sub-class" Vic cloning law (CathNews, 11/5/07)
Hart confronts Bracks over cloning legislation (CathNews, 12/4/07)
Bracks defies Pope on cloning (CathNews, 19/3/07)
Archbishop Hart condemns cloning laws (CathNews, 14/3/07)
Christianity not driver in cloning vote: Garrett (CathNews, 19/12/06)
Christian opposition fails to stop cloning bill passage (CathNews, 7/12/06)
Late amendment puts cloning bill passage in doubt (CathNews, 6/12/06)
Premiers face stem cell backlash as Hart criticises debate (CathNews, 24/7/06)
Catholics divided over stem cells (CathNews, 14/7/06)
Don't lift ban on cloning, says Brennan (CathNews, 23/6/06)