The Douglas County Colorado Sheriff's Office's Internet Crimes Against Children unit has been investigating Andersen since February in reference information that was provided by a law enforcement agency in California, the department said.
No arrests have been made.
The Nuggets' announcement came as the team faces elimination heading into Game Six of their best-of-seven Western Conference quarter-final against the Los Angeles Lakers on Thursday.
"The Denver Nuggets are aware of today's media reports involving forward/center Chris Andersen," the team said in a statement. "It involves a legal investigation and we are awaiting further details.
"Chris has been excused from all team-related activities indefinitely as he deals with the reported investigation."
Andersen, a reserve who averaged 5.3 points and 4.6 rebounds during the regular season, has not played in the postseason.
The Nuggets declined further comment and a National Basketball Association (NBA) spokesman said the league is monitoring the situation.
A Sheriff's Office statement said it had recovered property from Andersen's residence in Larkspur, Colorado, it believed is connected with the case.
"This is an active and on-going investigation and no further information is available at this time," the statement added.