The ruling prompted an immediate protest from Tokyo, which is embroiled in disputes with Seoul over history and territory.
The 14th century Buddhist statue was stolen by South Korean thieves from the Kannon Temple in Tsushima, Japan, five years ago.
It was confiscated by South Korean authorities and Tokyo sought its return.
But the Daejeon district court awarded it to the Buseok Temple near the southern city of Seosan, from where it was allegedly plundered by Japanese pirates long ago.
Ancient scripts found inside the 50.5 centimetre (19.9 inches)-tall statue indicate that it was dedicated to the Buseok Temple in the early 14th century.
Japan's top government spokesman Yoshihide Suga expressed regret at the decision and urged Seoul to return it immediately.
"Through diplomatic channels at various levels, the government has asked for an early return of the Buddhist statue, which has yet to be given back," he said.
"It is extremely regrettable that this ruling came against this background. We will urge the Korean government side to take appropriate action so that the statue will be returned to Japan promptly," he added.
The two countries are also involved in a territorial dispute over small islands - called Dokdo in South Korea and Takeshima in Japan - in the Sea of Japan, known as the East Sea in South Korea.
Another statue stolen by the same South Korean thieves from a different Japanese temple, a bronze standing image of Buddha, was returned to Japan in 2015 as South Korean investigators were unable to confirm whether it was originally plundered or given as a gift to Japan.
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