The state's Department of Agriculture had previously said it would not allow milk companies to say products are free from recombinant bovine somatotropin (rBST).
But following consumer outcry state governor Edward Rendell intervened and ordered a review.
Pennsylvania's move will bring the state's labelling guidelines in line with 1994 Food and Drug Administration (FDA) milk labeling guidelines.
Now companies will be able to say its milk has been made from cows which have not been treated with rBST, but they will also have to carry the label " No significant difference has been shown between milk derived from rBST-treated and non-rBST-treated cows."
Processors have sought to add a no-rBST label in response to consumer demands for foods which are as free from additives and other artificial added extras.
But Monsanto, which manufactures rBST, has maintained that firms labeling products rBST free are misleading consumers into thinking they are superior to those from cows treated with the hormone.
A spokesperson for the American Dairy Association and Dairy Council said the u-turn would mean processors may be able to charge more for milk which claims to be rBST free.
Companies wishing to uses this claim must keep a record of production methods so they can be verified by the Department of Agriculture.
Only milk which is entirely free of the artificial hormone can make the claims.
BST or bovine somatotropin is a naturally occurring protein hormone in the pituitary gland of cattle.
Monsanto's synthetic version is injected into a cow to increase milk production.
The hormone, which Monsanto terms a "supplement", is widely used around the US.
According to the firm's estimates, about one third of the nation's dairy cattle are given rBST.
However, the practice is banned in Japan, Australia, New Zealand, Canada and most of the EU.
Governor Rendell said: "Consumers can have confidence that the claims made by labels are accurate and, for the first time, used in a uniform manner ."
He added legal action will be taken against companies which do not follow the standard.
FDA advice In 1994, FDA published voluntary guidance to the dairy industry, recommending a certain formula to adopt when making rBST-free claims.
The agency said that because of the presence of natural BST in milk, no milk is 'BST-free,' and a 'BST-free' labeling statement would be false.
It added that it was also "concerned" that the term 'rbST free' may imply a compositional difference between milk from treated and untreated cows rather than a difference in the way the milk is produced.
FDA said that misleading implications could best be avoided by the use of accompanying information that puts the statement in a proper context.
For example, accompanying the statement " from cows not treated with rBST'' with the statement that "No significant difference has been shown between milk derived from rBST-treated and non-rBST-treated cows'' .