The story led to a flurry of media interest after reports that the donkey had been arrested and later granted bail. However, police told the BBC that the animal had simply been impounded for four days.
Donkeys are frequently used as beasts of burden in rural areas of Pakistan and betting on donkey-cart races is not uncommon.
The recent case occurred in the rural outskirts of Rahimyar Khan city. Police swooped on the race before it began.
Apart from the donkey, the officers also recovered from the scene a donkey cart, 121,000 rupees (about $740; £580), a cloth sheet spread on the ground on which the betting money was arranged, and a stop watch.
While the rest of the case property has been kept under a seal at a police lock-up, the donkey spent its four days of captivity tied in a cattle yard near the police station.
On Wednesday, the court handed custody of the donkey to its owner, Ghulam Mustafa (known by his alias Kaka), on condition of safe-keeping until the case was decided.