Indonesia has welcomed a US decision to restore military ties between the two governments, but human rights groups have expressed concerns.
The US sees Jakarta as a valuable ally in the Muslim world
Indonesia's president said the US move marked a new chapter in relations.
But one activist said it "betrayed the untold tens of thousands of victims of the Indonesian military's brutality".
A ban on military contact was put in place in 1999 in response to the violent suppression of the independence movement in East Timor.
Indonesia's President Susilo Bambang Yudhoyono spoke of a "new page".
"This is a new page, a new chapter in the strategic relations between Indonesia and the United States which have since 1999 gone through substantial ups and downs in relation to its defence cooperation," he said.
The Indonesian military said it would not comment until US President George W Bush presented the proposals to Congress.
The decision was announced by the US government late on Tuesday.
"Indonesia is a voice of moderation in the Islamic world," state department spokesman Sean McCormack said, in a statement.
He said this was in light of Indonesia's "significant progress in advancing its democratic institutions".
He added that it would allow the United States to help modernise the Indonesian military and increase co-operation against terrorism.
But human rights groups criticised the decision.
"Not even two weeks ago, Congress sent a clear message to the Indonesian government and security forces that it expected real improvements in military reform, human rights protections, and accountability for crimes against humanity," said John Miller, from the East Timor and Indonesia Action Network.
"With the stroke of a pen... President Bush betrayed the untold tens of thousands of victims of the Indonesian military's brutality in Indonesia and East Timor," he said.
Washington broke off military ties with Indonesia after pro-Jakarta militias went on the rampage in East Timor during and after the province's vote for independence from Indonesia in 1999.
The warming relationship between Washington and Jakarta has been driven by both President Susilo Bambang Yudhoyono's reformist programme and Indonesia's position on the front line in the war on terror.
Although Indonesia - with the largest Muslim population in the world - is no supporter of the war in Iraq, it has come down hard on its home-grown Islamic militants, and has co-operated with the US on other joint threats.