Israel Museum spokeswoman Dena Scher said the museum purchased the "Garden in Wannsee" painting by the German-Jewish artist Max Liebermann from the owner's heir after ownership was established. The painting is already on display in the museum and will stay there.
The painting's original owner, Max Cassirer, was a wealthy Berlin businessman from a family of art dealers. The impressionist painting, which depicts the garden of the artist's summer residence, was confiscated by the Nazis in 1941 together with Cassirer's other assets. After the war, it was given to a Jewish restitution organization and found its way to Israel.
In 2012, the work was identified by the designated heir after discovering a photograph from Cassirer's music room in which the walls were covered in paintings, including the Liebermann work.
"The rightful restitution of works of art that were stolen or unwillingly sold during the Second World War is a challenge that many continue to face," said museum director James Snyder. "We do our best to be exemplary in the handling of World War II restitution claims and are especially pleased to be able to achieve a resolution in the case of Max Liebermann's masterwork Garden in Wannsee."
The heir chose to remain anonymous. Imke Gielen, the lawyer who handled the case, refused to say at what price the painting was purchased, saying only that "the price is based on the market value."
Other Liebermann works have previously sold for hundreds of thousands of dollars.
Gielen commended the museum for its handling of the case. "Once they are approached regarding a piece of art, they are usually very proactive about the restitution," she said.
Experts believe that hundreds of thousands of pieces of looted art remain unclaimed.
The Israel Museum holds some 1,200 pieces of art identified as having been seized from Jews by the Nazis and has restituted over two dozen. The museum has launched an internet catalog of the works to help identify heir or the artwork.
Kirsten Grieshaber in Berlin contributed to this report.