By Elizabeth Barber

BOSTON (Reuters) - For the first time in the 114-year history of Boston's St. Patrick's Day parade, gay rights activists marched openly on Sunday under rainbow banners in the city's annual celebration of its Irish heritage, after organizers lifted a longtime ban.

Two groups, Boston Pride and OutVets, were among dozens of contingents taking part in the parade through the center of South Boston, once an insular Irish-American neighborhood near downtown that has undergone gentrification in recent years.

"South Boston is more diverse then it's ever been and our inclusion is a testament to change in the neighborhood," said Sylvain Bruno, president of Boston Pride, as he waited to march.

Organizers had excluded gay groups for two decades, maintaining that homosexuality conflicted with Roman Catholic doctrine. But they came under intense pressure to change their position, which ran counter to the liberal attitudes that prevail in Massachusetts. The state was the first in the United States to legalize same-sex marriage in 2004.

"Finally in the city of Boston we're seeing the inclusivity we never thought we would see," said Bryan Bishop, the 46-year-old founder of OutVets, representing gay military veterans. "This is personally one of the greatest days of my life."

The Allied War Veterans Council of South Boston, which organizes the event, shortened the parade route by about half this year, after the city's near-record snowfall in recent weeks made it difficult to clear roads.

"I'm always proud of my city, but I'm especially proud today" said Liz Palmer, a 23-year-old student watching the parade with friends under overcast skies.

The lifting of the ban was not without controversy. The Massachusetts contingent of Knights of Columbus, a Catholic men's organization, pulled out of the parade on Friday, calling the event "politicized and divisive."

Mayor Martin Walsh, who last year skipped the parade because of its exclusion of gay groups, was marching on Sunday, becoming the first mayor to do so in 20 years.

Boston's mayors have stayed away since 1995, when the U.S. Supreme Court upheld the right of the organizers to ban participants identifying themselves as homosexual.

"With this year's parade, Boston is putting years of controversy behind us,” Walsh said in a statement.

In New York City, Mayor Bill de Blasio has said he will boycott his city's St. Patrick's Day Parade again this year because its organizers have allowed only a single gay rights group to march.

(Editing By Frank McGurty and Frances Kerry)