When a website is punished for keyword stuffing, does it mean that this website is can be dropped out of the SE’s for these keywords?
yes
After decreasing density a website will return back in the SE’s for these keywords? How long would this take?
Yes, after reducing the density, when the bots crawl your site again, they’ll take note of it and put you back.
As to how long it will take to regain your ranking….No definite figure, but i’ve heard of people who took roughly 1month+, and people who never regained their rankings