It is the first institution to agree to the full repatriation from a museum of a Benin bronze, raising pressure on other establishments, including the British Museum, to follow suit.
The university acquired the bronze sculpture depicting an "Oba" (king) of Benin at auction in 1957, and it is considered a classic example of Benin Late Period Art.
It was originally taken in 1897, when a British military expedition attacked and destroyed Benin City, looting thousands of metal and ivory sculptures and carvings, known as the Benin bronzes, from the royal palace.
Benin City, in present-day southern Nigeria, was the seat of a powerful West African kingdom at the time.
The university called it "one of the most notorious examples of the pillaging of cultural treasures associated with 19th century European colonial expansion".
"It would not have been right to have retained an item of such great cultural importance that was acquired in such reprehensible circumstances," said university vice-chancellor George Boyne.
Neil Curtis, head of museums and special collections, said a review of its collections identified the work "as having been acquired in a way that we now consider to have been extremely immoral.
"So we took a proactive approach to identify the appropriate people to discuss what to do," he added.
A panel of academic specialists and curators unanimously recommended its return to Nigeria and the university's governing body supported the unconditional return.
Nigeria's minister of information and culture Lai Mohammed called the move a "step in the right direction" and urged other holders of Nigerian antiquity "to emulate this".
Some museums support the creation of the Edo Museum of West African Art in Benin City to house the looted artefacts.
These include the British Museum, which cannot legally give up possession of its artefacts and is reportedly considering lending its bronzes.
A Cambridge University college said in 2019 it would return a Benin bronze of a cockerel that was taken down from display at the famous education establishment after a student protest.
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