Musk, who has called himself a "free speech absolutist," recently agreed a $US44 billion ($A64 billion) deal to acquire the social media platform.
The suspension of Trump's account, which had more than 88 million followers, silenced his primary megaphone days before the end of his term and follows years of debate about how social media companies should moderate the accounts of powerful global leaders.
Trump was permanently suspended from Twitter shortly after the January 6 riots at the US Capitol.
Twitter cited "the risk of further incitement of violence" in its decision. The decision amplified his views among people on the political right, Musk said, calling the ban "morally wrong and flat-out stupid".
Trump previously told Fox News that he would not return to Twitter even if Musk purchases the platform and reinstates his account, and said he would use his own social media app called Truth Social.
Musk added that his distaste for permanent bans is shared by Twitter co-founder and former CEO Jack Dorsey.
He said: "I think there's a general question of should Twitter have permanent bans? I've talked with Jack Dorsey about this and he and I are of the same mind which is that permanent bans should be extremely rare and really reserved for accounts that are bots or spam scam accounts."
"I do think that it was not correct to ban Donald Trump. I think that was a mistake because it an alienated a large part of the country and did not ultimately result in Donald Trump not having a voice... I think this could end up being frankly worse than having a single forum where everyone can debate "So I guess the answer is that I would reverse the permanent ban, obviously, I don't own Twitter yet, so this is not a thing that will definitely happen because what if I don't own Twitter?
"But my opinion and Jack Dorsey - I want to be clear - shares, that we should not have permanent bans.
"Now, that doesn't mean that somebody gets to say whatever they want to say, if they say something that is illegal or otherwise, just destructive to the world, then that there should be perhaps a timeout, a temporary suspension, or that particular tweet should be made invisible or have very limited traction."
Musk said the ban undermined the public's trust in Twitter.
He also spoke of wanting to build trust with users of the platform by showing them "how the algorithm works" and allowing them to "suggest changes".