Premier Mike Baird announced the decision on Thursday morning, three months after former High Court judge Ian Callinan recommended the changes to the government. The changes begin in January.

In the first major review of the laws since they were introduced in early 2014, Mr Callinan advised that a 2am lockout and 3.30am last drinks in venues with live entertainment could be trialled for two years.

He said the government could consider shifting the state-wide ban on takeaway alcohol sales after 10pm to 11pm and for home delivery to midnight.

But he warned that any relaxation of the lockout and last drinks laws "carries the risk of greater density and consumption of more alcohol" in Kings Cross and the CBD and changing the takeaway laws "may elevate the risk of domestic violence".

The cabinet has agreed to adopt Mr Callinan's recommendations, which he argued could help restore some of the "vibrancy" lost to the areas following the introduction of the laws almost three years ago.

"The lockout laws are staying," Mr Baird said. "There's no doubt they have been saving lives."

The Premier said the changes would be "dynamic" and reviewed annually with possible liberalisation if violence levels drop or further restrictions if they increase. "We're not returning to those days of violence," he said. "[We will] look at the statistics, this is an ongoing conversation. "The good news is we're listening."

The Minister for Justice and Police Troy Grant said the definition of a live entertainment venue would be decided on by government bureaucrats. "They're fairly liberal," he said while adding that strip clubs would "certainly" not be captured. 

Venues will be able to apply for classification as live entertainment locations from January.

Mr Grant said the only recommendation not implemented from the Callinan review was to allow home delivery of alcohol till midnight as that was not available in rural areas. "I said 'Fair for one, fair for all'," he said.

Small bars are also set to get bigger and operate longer under the changes. Maximum occupancy rates will be raised from 60 to 100 people and their closing times shifted from midnight to 2am.

​Comment is being sought from hoteliers, medical groups and alcohol policy organisations.

The rules were introduced in response to the deaths of teenagers Thomas Kelly and Daniel Christie from unprovoked attacks.

NSW Bureau of Crime Statistics and Research data shows there has been a 45.1 per cent reduction in non-domestic assaults in Kings Cross and a 20.3 per cent reduction in the CBD since the introduction of the lockout laws.

But licensees in the lockout zones say business has plummeted and groups such as Keep Sydney Open, say Sydney's late-night and live-music culture has been destroyed.

Mr Baird has been lampooned as "Casino Mike" because The Star casino at Pyrmont and James Packer's planned VIP casino at Barangaroo are exempt from the lockout and last drinks laws. 

Sydney Morning Herald