Correction: An earlier version of this article misstated the last name of a business owner in Indiana. He is Bob Frist, not Bob Grist. This version has been corrected.


Elizabeth Ladd, owner of River Knits Fine Yarns, holds a “This business serves everyone” sticker that she plans to display at her business in Lafayette, Ind. (Nate Chute/Reuters)

At Calvin Fletcher’s Coffee Company, a sign taped to the front door says, “WE SERVE EVERYONE,” inviting out-of-towners of all sexual orientations to enjoy an organic mocha latte.

At Silver in the City, a downtown gift shop, Kristin Kohn quickly sold out of rainbow-themed T-shirts with the words: “We like you here.” And at Chilly Water Brewing Company about a mile from Lucas Oil Stadium, home to this weekend’s NCAA men’s basketball Final Four, owner Skip DuVall assured customers that no one — gay or straight — would be denied a pale ale.

“This thing is suicide,” DuVall said of the Religious Freedom Restoration Act, a new state law that many view as a license to discriminate. “It makes us look bad. Real bad.”

With Indianapolis preparing for one of its biggest events of the year, the national uproar over the religious freedom act, which is to take effect in July, could not come at a worse time. The local economy is built on tourism, particularly sports events and conferences. Businesses across the city say they are scrambling to salvage both the Hoosier reputation and their bottom lines.

From the streets of Indianapolis to statehouses across the South, the religious freedom issue is aggravating divisions between social conservatives, who promote the measures, and Main Street conservatives, who see them as bad for business.

On Wednesday, Arkansas Gov. Asa Hutchinson (R) said he would not sign a newly passed religious liberty bill in that state, reversing course after entreaties from both Wal-Mart, the state’s biggest employer, and his son, Seth, 31.

“This is a bill that in ordinary times would not be controversial. But these are not ordinary times,” Hutchinson said, urging lawmakers to send him a revised measure.

Late Wednesday, Republican leaders in Indiana announced that they had settled on a proposed “clarification.” They plan to announce details early Thursday alongside business leaders, including officials from pharmaceutical giant Eli Lilly and Co., one of the state’s largest employers, and Salesforce, a high-tech company. Both firms had been sharply critical of the law. The General Assembly could vote on the change later in the day.

Details of the remedy were not available late Wednesday, and it was not clear whether the proposal would solve what Indiana Gov. Mike Pence (R) called a “perception problem” with the law.

That problem was vividly illustrated Tuesday by Crystal O’Connor, whose family owns Memories Pizza in Walkerton, about 150 miles northwest of Indianapolis. O’Connor cited the law when she told a news station that she would not make pizza for same-sex weddings.

“We’re not discriminating against anyone,” she said. “That’s just our belief, and anyone has the right to believe in anything.”

That view is mistaken, according to Daniel O. Conkle, a law professor at Indiana University. Writing last week in the Indianapolis Star, Conkle said no court has ruled in favor of a business seeking to deny wedding services to a same-sex couple.

Noting that “most religious freedom claims have nothing to do with same-sex marriage,” ­Conkle wrote that the Indiana law “would provide valuable guidance to Indiana courts, directing them to balance religious freedom against competing interests.”

The rush to amend the Indiana law came a day after the president of the National Collegiate Athletic Association, which is based in Indianapolis, threatened to relocate future events. And Angie’s List, an economic anchor here (as well as one of Pence’s biggest campaign contributors), halted plans for a $40 million expansion, jeopardizing hundreds of potential jobs. Dozens of corporations, from Apple to Gap, have publicly denounced the law. A commercially ominous hashtag persisted for days on Twitter: #BoycottIndiana.

Pence has strongly defended the Indiana statute, which grants individuals and businesses legal grounds to protect themselves against claims of discrimination. He said the law is meant to protect people and institutions such as the University of Notre Dame, which recently objected on religious grounds to a mandate in the federal Affordable Care Act that requires employers who provide health insurance to cover contraceptives.

Many Indianapolis residents, however, fear that the law will undermine the city’s transformation from Rust Belt ghost town to Midwest success story. The state capital is one of more than a dozen Indiana communities that have adopted local civil rights protections for gay people. It has also built a reputation as a prime destination for conventions and sporting events.

In 2012, the Super Bowl pumped $277 million into the local economy, according to the city. (Indianapolis is angling to attract the game again.) The Final Four, which brought $50 million to the city in 2010, is projected to pour $70 million into the economy this year.

Indianapolis Mayor Gregory A. Ballard (R) said he is not overly concerned that the new law will disrupt this weekend’s Final Four festivities. Basketball fans, he said, have no time to change their plans.

“But afterward,” he said, “we’ll have to see.”

Ballard said he worries that the law could turn off businesses and educated millennials. Already, Gen Con, the summer gaming festival held annually at the Indiana Convention Center, has said it would go elsewhere if the state fails to adopt meaningful protections for gay men and lesbians.

“They need to fix the perception that’s out there,” Ballard said of state lawmakers. “They can’t just put some fancy words on it.”

In shops across the city, people expressed the same fear: that lawmakers would fail to deliver explicit language, that the world would continue to perceive Indianapolis as a city that rejects those who are different. All-are-welcome signs have cropped up in dozens of shop windows, scrawled in rainbow chalk and printed on big blue stickers.

Meanwhile, Visit Indy, the city’s convention and visitors association, has erected five-foot concrete letters around town: “NDY.” Marketing director Jeff Robinson, 39, encouraged pedestrians to complete the word by becoming a human “I.” The idea is to take a photo and post it on social media with the hashtag #IndyWelcomesAll.

“We’ve been asked by a lot of people, by convention planners from around the country: ‘Are there places we can go in Indy where we’ll be welcome?’ ” Robinson said. “We want the world to know it’s business as usual in Indy, regardless of legislation.”

Doug Litsey, 63, co-owner of Calvin Fletcher’s Coffee Company, remembers how his downtown neighborhood looked less than a decade ago: Before swanky apartments sprouted up in Fletcher Park, once known for a smoky tavern, a tiny insurance company and bleak views of Interstate 70. Before an upscale Italian eatery inhabited the old warehouse next door. Before a new brunch spot drew lines across the street with sweet-tea fried chicken. And Fletcher Park represents a mere slice of the citywide transformation.

“I’ve seen so much change in the 34 years I’ve lived here,” said Litsey, a soft-spoken pastor with a wiry gray beard who preaches at a nearby nondenominational church. “All built on love, on acceptance. Now it feels almost oppressive to be living in this kind of atmosphere.”

Not everyone agrees. Carl Kelley, 68, an Uber driver and pastor in the Christian Methodist Episcopal Church, accused LGBT activists of “using this law as an excuse to push their agenda on people who stand by the Bible.” Still, Kelley said: “We will drive anyone. We are not bigots. We are not ogres.”

Back at the Chilly Water Brewing Company, DuVall, who opened the brewpub nine months ago, worried that negative publicity about the law might drive away tourists. He’s counting on basketball fans to wander in this weekend and order his site-brewed beers.

“We are on such an upward momentum,” said Bob Frist, a regular at the bar who owns a local architecture firm. “And this thing is such a diversion.”

Frist lives in this neighborhood and is proud of its growth, its progress. His son was “brave enough to come out in high school,” Frist said. He now lives in Los Angeles with his husband and 4-year-old twin girls.

Frist, 63, wants them to feel comfortable when they visit. This is his son’s home, he said, tears clouding his light-blue eyes, and the law shouldn’t suggest he’s not welcome here.

Sandhya Somashekhar in Washington contributed to this report.