A "rainbow fountain" would flow with bubbles every hour and Taylor Square would be renamed Equality Square under plans put forward to mark gay pride on Oxford Street.
The community has also suggested a giant flag, to be lit up at night, a rainbow "glitter pole" made of sequins and a multicoloured voltaic floor that creates a rainbow as you walk across it.
The ideas were put forward at a community forum this month. The City of Sydney on Monday night voted to assess which ideas were feasible and had the most public support.
It comes almost three months after roads authorities controversially removed a popular rainbow-coloured pedestrian crossing from Taylor Square after it was deemed a safety risk.
Lord Mayor Clover Moore said the ideas confirmed the public was “looking for something beyond a rainbow flag” to permanently recognise the gay, lesbian, bisexual, transgender and intersex community.
Other ideas raised by the community included permanent rainbow lights on the street and in trees, a three-storey high hanging rainbow, “gay street furniture” and a line of closets encouraging people to “come out in Sydney”.
Ms Moore said preferred ideas “may require further development, including the involvement of artist to ensure that the outcome meets the community's aspirations”.
The council has also written to the state and federal governments about challenges facing Sydney's gay community, raised at this month's forum, spanning areas such as education, health, aged care, policing, the needs of young people and the need to combat discrimination and homophobia.
The rainbow crossing was installed in February to mark 35 years of the Sydney Gay and Lesbian Mardi Gras, but lasted only one month before being ripped up late one night at the direction of Roads Minister Duncan Gay.
Road experts supported the move, saying the crossing, on which people had been spotted lying down and taking photos, contravened safety guidelines.
But the removal sparked widespread outrage, and prompted a flurry of impromptu rainbow flags and DIY chalk crossings across Sydney.