The Derry-born poet – who once famously protested at being included in the 'Penguin Book of Contemporary British Poetry' because his "passport's green" – said there was "never going to be a united Ireland" so "why don't you let them (loyalists) fly the flag?"
Almost two months of angry loyalist protests have followed the new flag policy, which was voted in by Sinn Fein, SDLP and Alliance councillors at the start of December. The flag will now be flown on designated days, such as royal birthdays.
In an interview with 'The Times' yesterday, Mr Heaney warned that times in Northern Ireland were "very dangerous".
He said that at the start of the Troubles in Derry, the Irish Nationalist politician Eddie McAteer told him "both sides are entitled to their pageantry".
Back in the 1980s, Mr Heaney objected to his inclusion in the 'Penguin Book of Contemporary British Poetry' with the lines, "Be advised, my passport's green/ No glass of ours was ever raised/ To toast the Queen."
But in relation to the flag row, he said: "They (the loyalists) have an entitlement factor running: the flag is part of it. There's never going to be a united Ireland. So why don't you let them fly the flag?"
SDLP Belfast City councillor Tim Attwood last night defended the decision.
Mr Attwood said the SDLP "remains committed to creating an Ireland, as John Hume said, 'built on respect for diversity and for political difference'."
He added: "That is why the SDLP supported an honourable compromise to fly the union flag on designated days."