Uganda's President Yoweri Museveni says leaders of the rebel Lord's Resistance Army (LRA) should face local justice, rather than trial at The Hague.
Mr Kony remains in DR Congo because of the ICC warrant
Three top LRA officials including leader Joseph Kony face prosecution at the International Criminal Court (ICC).
The LRA insists that the war crimes indictments are lifted before signing a deal to end the long, brutal conflict.
The 22-year rebellion in northern Uganda has left thousands dead and nearly two million displaced.
The government and the LRA have been holding peace talks for the past 18 months in South Sudan's capital, Juba.
Mr Kony has sent his representatives to the talks but has refused to attend them himself, fearing arrest.
He remains in a jungle hideout in the remote north-east of Democratic Republic of Congo.
The rebels have been notorious for abducting children to be used as fighters, porters and sex slaves.
Mr Museveni said in London that local tribal elders had asked for local justice to be applied, rather than a trial at the ICC in The Hague.
"What we have agreed with our people is that they should face traditional justice, which is more compensatory than a retributive system," Mr Museveni told the AP news agency.
"If that's what the community wants, then why would we insist" on a trial in The Hague, he said.
The BBC's Sarah Grainger in the Ugandan capital, Kampala, says that what Mr Museveni is saying is not new as over the last few weeks the rebels and government have signed a few documents in the lead-up to the expected comprehensive peace agreement.
One of the accords deals with justice and accountability, and it was agreed a special division of the Uganda High Court will be set up to try those accused of serious crimes and other fighters would face traditional justice.
The LRA leaders could be required to apologise for their actions and make a payment to local elders, but they would avoid prison sentences.
"In that case, we can approach the ICC and say, yes, those people who we have brought to your attention have now come [back]... Therefore we ask you to withdraw our complaint," Mr Museveni is quoted by Reuters news agency as saying.
Uganda's president does not have the power to make the ICC withdraw the arrest warrants although they were issued at the request of his government - before peace negotiations began.
Almost two million people have fled their homes
Our correspondent says Mr Museveni may be hinting ahead of a final peace deal, that LRA leaders need not fear that Uganda would hand them over to the ICC.
LRA officials are currently in The Hague trying to get the warrants lifted.
But last week, ICC prosecutor Luis Moreno-Ocampo refused to meet LRA representatives and said the indictments remained in place.
In 2005, the ICC charged five LRA commanders with war crimes and crimes against humanity - two have since been killed.
The ICC was set up six years ago as the world's first permanent war crimes court.
Correspondents say Mr Museveni's decision puts the court in an awkward position, for if it does decide to drop the arrest warrants it could be accused of bowing to political pressure.
If it does not, it risks upsetting Uganda's delicate peace process.