Under the plans, the former Wimbledon greyhound track would be taken down and replaced with a 20,000 seat stadium to be used by AFC Wimbledon.
Galliard Homes, who submitted the planning application, would also build houses and a fitness club.
After a two-week consultation, Khan has decided Merton Council should make the decision on the stadium. The council approved the application in December 2015 but former Mayor Boris Johnson called it in to City Hall in March.
Sadiq Khan said: "I have taken the time to consult local residents, businesses and other interested parties and, having weighed up all of the evidence available to me, I’m confident the stadium and the leisure facility proposed alongside it will be of great benefit to Londoners and the wider community for generations to come.
"As such, I have decided to return the application to the local council to determine itself."
Dan Watkins, Conservative campaigner for Tooting, said many local people are worried that Merton Council are not providing enough new community services to cope with the new people who will be coming into the area. Around 600 new homes are being built, allowing roughly 1,500 new people to move into the area.
"People aren't against the development per se," Watkins said. "But let's make sure there is proper funding for more school places, transport and parking."
Leader of Merton Council, Councillor Stephen Alambritis said: "I am absolutely thrilled with the Mayor’s decision to hand the decision back to us and we look forward to the home-coming of this much-loved and well-deserving team. Merton wants to see AFC Wimbledon back on Wimbledon turf.
"We will now be working with the applicant towards the delivery of the site. The club has been very patient throughout the process and now the dream of players and fans alike, many of whom are local, is set to become reality."