One of the USA’s most prestigious galleries is to return a Picasso drawing to the heirs of a German Jewish banker who was victimised by the Nazis.

The small 1903 portrait, Head of a Woman, dating from the artist’s Blue Period, which once belonged to Paul von Mendelssohn-Bartholdy, was acquired by the National Gallery of Art in Washington in 2001.

Mendelssohn-Bartholdy’s family bank had been the fifth largest privately owned in Germany.

His illustrious forebears included the composer Felix Mendelssohn and the philosopher Moses Mendelssohn.

But after the Nazis came to power in 1933, he was ejected from the German banking association and his income plunged. He sold his collection of paintings to a dealer in 1934 and died of a heart attack the following year.

The bank was transferred to non-Jewish ownership in keeping with the Nazis’s aryanisation policy in 1938.

According to the New York Times, the gallery said it was returning the picture to avoid the cost of litigation but that this did “not constitute an acknowledgment of the merit or validity of the asserted claims”.

But John J Byrne, the heirs’ lawyer, said the sale had been made “under economic duress”.

One of the heirs, Julius Schoeps, director of the Moses Mendelssohn Centre for European Jewish Studies in Potsdam, Germany, told the Washington Post: “This distinctive artwork is both a poignant reminder of the enormous impact that Nazi policies had upon the contents of many private and public art collections today, as well as the Mendelssohn family’s tragic history in Nazi Germany.”

Another Picasso from the Mendelssohn-Bartholdy collection, The Absinthe Drinker, was once owned by the Andrew Lloyd-Webber Foundation. After reaching a settlement with the heirs, the foundation sold it for nearly £35 million to fund stage bursaries for underprivileged children.