Prime Minister Adnan Terzic said that the commission would consist of ten members and that their task would be to investigate war crimes committed among all ethnic communities in the Sarajevo area.
The move came following a decision made by the state parliament in January.
Terzic initially opposed the decision, saying that all war crimes committed in the country should be investigated without restricting investigations to particular areas or particular ethnic groups.
Serb deputies walked out of the state parliament on Wednesday in protest as such a stance, saying they would boycott parliamentary sessions and seek Terzic's resignation.
Terzic said he had changed his view because he did not want to give an excuse to those taking this issue as a pretext for blocking further reform.
He said that the government would propose establishing a state commission to investigate war-time events throughout the country.
The idea of setting up a commission to investigate war crimes committed in the Sarajevo area came from Bosnian Serb organisations of former prisoners of war and the families of Serb people who had been killed or were listed as missing during the war.
Some of those organisations claim that as many as 5,000 Serbs were killed in the Sarajevo area during the war.
According to available information, slightly over 10,000 people, including 1,500 children, were killed in Bosnian Army-controlled areas of Sarajevo by Serb shelling and sniper fire during a three and half year siege of the city.