The alert status was raised to maximum a week ago after Mount Gamkonora, on the remote island of Halmahera, started shooting out towering columns of ash and smoke, sparking concerns of a major eruption.
About 12,000 people fled the area to shelter in temporary camps, or stayed with friends and relatives in safer locations.
Saut Simatupang, head of Indonesia's Vulcanology Survey, said the alert level was lowered one notch early on Monday after the volcano showed signs of decreased activity.
"Under the alert current level we advise people to return to their homes," Simatupang told Reuters.
"Those who live in a radius of 6 kilometres (3.7 miles) are advised to stay in temporary shelters but they can return to their homes during the day," he said.
The 1,635 metre (5,400 foot) volcano is located about 2,400 km (1,500 miles) east of the capital Jakarta.
The last time ash and smoke streamed out of the volcano was in 1987. No casualties were reported.
Indonesia has the highest number of active volcanoes of any country, sitting on a belt of intense volcanic and seismic activity known as the "Pacific Ring of Fire".
- Reuters - Thomson Reuters Foundation
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