The 39 US embassy documents cover the period from 1964-1968, at the peak of the Cold War, and uncover new details about one of the most tumultuous periods in modern Indonesian history.
Historians say up to 500,000 alleged Indonesian Communist Party (PKI) supporters were killed between October 1965 and March 1966 by soldiers and civilian militias after the army launched a campaign to crush the Indonesian communist party and its leaders following a failed coup.
General Suharto, who put down the coup, blamed the Indonesian Communist Party and rose to power on the back of the bloodshed, going on to lead the world's most populous Muslim nation with an iron fist for three decades.
During his rule, the massacres were presented as necessary to rid the country of communism, Indonesia had the world's third-biggest communist party after China and the Soviet Union before the killings.
The declassified documents show how US officials across the archipelago knew of the massacres, including the complicity of prominent Muslim civil society groups in the killings.
In one telegram sent from the city of Surabaya on November 26, 1965 the US consul said the number of reports coming in from East Java were an "indication (of) widespread slaughter" adding as many as 15,000 communists may have been murdered in a single massacre.
A month later the same consul said communist prisoners held by the military were being "delivered to civilians for slaughter".
Other victims were "taken out of populous areas before being killed and bodies are buried rather than thrown into river".
A cable the same month from the US consulate in Medan, on the western island of Sumatra, detailed how Muslim preachers described the killings as a religious obligation.
'Lowest order of infidel'
The cable said preachers from Muhammadiyah, one of the country's largest Muslim groups, described communists as the "lowest order of infidel, the shedding of whose blood is comparable to killing chicken".
A cable dated December 1965, written at the height of the killings by Embassy First Secretary Mary Vance Trent, noted the "striking success" of the army's campaign.
She said the "jolts" had resulted in an estimated 100,000 PKI deaths, including 10,000 alleged sympathisers in Bali alone.
Other documents show the US kept detailed lists of PKI officials and discussed providing the Indonesian army with covert support, money and arms.
Human rights activists reacted to the release by urging the US and Indonesia to disclose all remaining classified documents on the massacres, which were the subject of the Oscar-nominated 2012 documentary "The Act of Killing".
"Those classified documents are crucial to an accurate historical record of the killings and to provide justice for those crimes," Human Rights Watch's Andreas Harsono told AFP.
The files also raise questions about the army's version of events surrounding a failed coup attempt on September 30, which remain part of the official record in Indonesia today.
The latest release comes amid a surge in anti-communist sentiment in Indonesia, stoked by Islamic hardliners and some politicians.
Public debate about the killings is still taboo in many quarters.
The government has taken some steps towards reckoning with the past by backing for the first time public discussions into the killings, attended by survivors and members of the military.
But those moves have also sparked a backlash from the military and police.
A spokesperson for the military, Wuryanto, said it would review the documents before commenting.
Last month an angry mob broke up an event organised by human rights lawyers that they believed was a discussion about communism.
Agus Widjojo, governor of the National Resilience Institute, a state security think tank, said Indonesia needed to reconcile with its past, but struck a note of caution.
"We don't know, if this will heal the wound and not open an old wound instead."
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