Prosecutors had asked that Private First Class Willie V Brand, 27, be sent to a military prison for 10 years with a dishonourable discharge for the 2002 beating.
Instead, the panel on Thursday reduced his rank to private, the lowest pay grade in the army. Brand sighed in relief and hugged his lawyer.
A commander reviews military jury decisions but cannot impose a more serious penalty.
"I definitely did not expect this," Brand said as he stood with his wife after the hearing. He said he was not sure if he would stay in the army.
Brand was convicted on Wednesday for assault, maltreatment, maiming and making a false statement in connection with an attack on a detainee known as Dilawar.
The jury acquitted him of charges that he abused a second detainee. Both prisoners died just days after arriving at the detention centre at Bagram airfield near Kabul. Murder charges were dropped earlier this year.
Brand's lawyers had argued that the military police officer from an Ohio-based reservist unit was ill-prepared to go into a war zone and simply did as he was instructed and as he saw higher ranking soldiers do.
His civilian lawyer, John Galligan, said on Thursday that Brand would be willing to testify if higher ranking soldiers who also served at Bagram faced charges.
In a statement, Brand had told the jury: "We were trained on these things and when we implement them we were condemned; if we asked questions we are condemned."
Galligan had argued that Brand's conviction was punishment he would carry the rest of his life.
"The situation there (in Iraq) was 10 times more violent, but still the elections went ahead. What you have here (Afghanistan) is already so much better"
Ronald Neumann, US ambassador to Afghanistan
He added he would appeal Brand's conviction.
Major Christopher Carrier had asked the jury to remember what he described as the cruelty Brand inflicted on Dilawar during a "sustained beating".
"Hold him accountable," Carrier said. "Thirty strikes is 29 opportunities to stop, but he did not do that. He hit him again."
In the latest in a spate of deadly anti-US attacks, a roadside bombing killed two US soldiers on Thursday as the new American ambassador warned that fighting was likely to continue in Afghanistan for some time.
But the envoy, Ronald Neumann, played down fears that Taliban-led fighters could prevent next month's legislative elections from going ahead.
"When millions of people want to go vote, they will go vote," he said on Thursday.
In the past six months, about 1000 people - 59 American soldiers among them - have died as anti-US fighters bent on attacking Afghanistan's US-backed recovery stepped up their assaults in the south and east of the country, drawing a strong response from the US military.
On Thursday, a homemade bomb hit a US military convoy supporting refurbishment of a road from the main southern city of Kandahar to outlying mountains.
Two soldiers travelling in an armoured vehicle were killed, the military said in a statement. Two others were wounded and evacuated to a nearby base and were in stable condition.
The US envoy said fighting was
likely to continue for some time
The recent loss of life pales next to the casualties suffered in Iraq but has dampened some of the optimism that prevailed in Afghanistan after inaugural presidential elections passed off peacefully last year and attacks dropped off during the winter.
"There is certainly more violence and there are violent elements trying to come back," Neumann said. "I think this is a situation that will probably be difficult for some time."
But he said there were enough international troops - some 21,000 US-led coalition troops and a separate 10,000-strong Nato-led peacekeeping force - as well as local Afghan forces to safeguard the polls.
"There are people who will try to kill candidates and who will try to stop the election," he said. "They will fail. They have absolutely no chance of stopping this election."
Comparison with Iraq
The diplomat, who previously worked in Baghdad, drew a comparison with the run-up to the polls in Iraq last January, saying the situation there was "10 times more violent", but still the elections went ahead.
"What you have here is already so much better," he said.
Brand was convicted of an attack
on a detainee known as Dilawar
His comments came a day after the start of a one-month official election campaigning period. The widespread violence and threats to kill candidates and voters have prevented many hopeful politicians from campaigning.
Afghan officials have long warned that fighters would try to subvert the polls, seen as the next key step towards democracy since the ouster of the Taliban in late 2001.
But officials are also upbeat that there will not be any major disruptions.
A "majority of the candidates will move forward with their candidatures, and the environment in most parts of the country will be conducive to free and fair elections", Foreign Minister Abdullah Abdullah said on an official visit to Australia.
But he conceded: "The upcoming election ... will not be without any challenge for us." Part of efforts to safeguard the elections has been an aggressive offensive by Afghan and coalition forces against insurgents in the south and east.
In the latest attack, American and Afghan troops, backed up by US warplanes, raided a suspected Taliban camp in Kandahar province's Khakrez district, killing five fighters, Afghan National Army commander General Muslim Amid said.
Preparations to protect the polls also have caused fatalities for Nato's forces. Two helicopters crashed in a western desert on Tuesday while training to provide security for the elections, killing 17 Spanish troops - the deadliest blow for the Nato force inside Afghanistan.
The crash was believed to have been an accident.
Meanwhile, a Lebanese engineer who had been kidnapped by suspected Taliban rebels over the weekend has been released.
Mohammad Reza said by satellite phone that he was fine and had been treated well by his kidnappers.
He was freed near a police checkpoint in southern Zabul province, said Ali Khail, a spokesman for the province's governor.
Reza, who was working on a US-funded road project, was taken captive by rebels as he drove on the main highway linking Kabul with Kandahar.