Old Woman Caudebec had been in the custody of the Hanlon family since it was acquired by Dunedin lawyer Alfred Hanlon QC in 1901.
However, when he died, the painting was inherited by his daughter, Eileen Hanlon, and then his grandson, the Rev Blair Robertson, who took it to Auckland.
When Mr Robertson died in January, the painting was listed for sale in his estate.
"When I heard it was up for sale, I rang [Dunedin Public Art Gallery acting director] Grant McDonald and said, 'This has to come back to Dunedin','' Mr Hanlon's granddaughter, Heather Fleming, said last night.
The gallery immediately bought the painting for an undisclosed sum through its acquisitions fund, which was recently increased by the Dunedin City Council.
"I'm not sure how my grandfather came to have it. The Otago Art Society exhibited it in 1901, so he probably bought it then,'' Mrs Fleming said.
"I last saw it about 15 years ago, but I remember it well from when I was a young girl. It's very exciting to have it back home again. I believe it's part of Dunedin history.''
The painting is the centrepiece of a Frances Hodgkins exhibition, "The Colour of Everyday'', which opened last night to mark the artist's birthday. It traces Hodgkins' development from a colonial artist in the early 1900s to a successful Parisian watercolourist.
Hodgkins painted Old Woman Caudebec in 1901 while studying watercolour painting in Caudebec-en-Caux, France.
Exhibition curator Jodie Dalgleish said the painting was an important acquisition for Dunedin.
"It's a very significant painting, because it's an important bridgework between her New Zealand works and her European works. It's an incredibly masterful watercolour.''
Hodgkins died in Dorchester, England in 1947.
"The Colour of Everyday'' will show at the Dunedin Public Art Gallery until October 12.
