It was recently revealed that the rapper - real name Park Jae-sang - had made comments calling for the deaths of US citizens at a protest concert in 2004.
A South Korean missionary had been executed in Iraq as a revenge killing for the country's support of the Iraq war, which was spear-headed by the US.
Reacting to this, Psy took to the stage to join Korean rock group N.EX.T to perform 'Dear American', apparently rapping: "Kill those f**king Yankees who have been torturing Iraqi captives / Kill those f**king Yankees who ordered them to torture / Kill their daughters, mothers, daughters-in-law and fathers / Kill them all slowly and painfully."
The 34-year-old rapper has now issued an apology for "how these lyrics could be interpreted" and expressed regret at the "inflammatory and inappropriate language".
"As a proud South Korean who was educated in the United States and lived there for a very significant part of my life, I understand the sacrifices American servicemen and women have made to protect freedom and democracy in my country and around the world," he said.
"The song in question - from eight years ago - was part of a deeply emotional reaction to the war in Iraq and the killing of two innocent Korean civilians that was part of the overall anti-war sentiment shared by others around the world at that time.
"While I'm grateful for the freedom to express one's self I've learned there are limits to what language is appropriate and I'm deeply sorry for how these lyrics could be interpreted. I will forever be sorry for any pain I have caused anyone by those words.
"I have been honoured to perform in front of American soldiers in recent months - including an appearance on the Jay Leno show specifically for them - and I hope they and all Americans can accept my apology.
"While it's important we express our opinions, I deeply regret the inflammatory and inappropriate language I used to do so. In my music I try to give people a release, a reason to smile.
"I have learned that though music, our universal language we can all come together as a culture of humanity and I hope that you will accept my apology."
Photo gallery - Psy performs at Seoul City Hall in South Korea: