Called the "Torso of Rama", the 10th century sandstone statue sans its head, arms and feet was acquired by the Denver Art Museum 30 years ago from the Doris Weiner Gallery in New York City.
The museum said it only realised the Khmer-era statue was looted from the Koh Ker temple near the famous Angkor Wat complex in the 70s after recent discussions with Cambodia.
"We were recently provided with verifiable evidence that was not available to us at the time of acquisition, and immediately began taking all appropriate steps... For its return home," the museum's director Christoph Heinrich said in a joint statement with the Cambodian government.
"We are joyful with the torso of Rama returning home," Cambodian official Yim Nolson said, and appealed to museums and collectors around the world to "follow this good example by returning the Rama's head to Cambodia".
Voluntarily returning the ancient statue highlights "the government's efforts to repatriate those artifacts that left the country illegally, which are parts of our soul as a nation", Cambodia's Secretary of State Chan Thani said in the statement.
Denver Art Museum director Christoph Heinrich and government officials draped jasmine garlands over the statue during the ceremony.
In January, a 7th century stone sculpture of Harihara, a deity that combines aspects of Vishnu and Shiva, was returned by France and reattached to its body for display at a museum in Phnom Penh, more than 130 years after it was spirited away.
Angkor Wat and other mighty cities and temples were built in Cambodia, which was home to the Khmer Empire, a Hindu- Buddhist dynasty.