Iranian leaders slammed the United States for putting Iran's elite Revolutionary Guard force on a list of foreign terrorist organisations.
"In Iran as well as abroad, this decision will not be recognised," President Hassan Rouhani said on Tuesday.
He said the Islamic Revolutionary Guard Corps (IRGC) had been in the forefront of the fight against terrorism, including against Islamic State in Iraq and Syria.
The terrorist designation takes effect in one week and includes the IRGC's Quds Force, the elite fighting force that carries out special missions abroad.
The designation will recognise "that Iran is not only a State Sponsor of Terrorism, but that the IRGC actively participates in, finances, and promotes terrorism as a tool of statecraft," US President Donald Trump said.
The State Department's list of foreign terrorist organisations includes 67 other groups including Hezbollah, Hamas and Palestinian Islamic Jihad.
In response to the US move, Iran's Supreme National Security Council announced that the United States would itself be designated a State Sponsor of Terrorism and Centcom, which oversees US military operations in the Middle East, would be designated a "terrorist group".
Iranian Foreign Minister Mohammad Javad Zarif called the move a "misguided election-eve gift to Netanyahu" and a "dangerous US misadventure in the region".
Israeli Prime Minister Benjamin Netanyahu, who is bidding for re-election on Tuesday, thanked Trump in a tweet.
"Once again you are keeping the world safe from Iran[ian] aggression and terrorism," Netanyahu said.
Iran's main regional rival, Saudi Arabia, on Tuesday welcomed the US move.
President Donald Trump announced the move on Monday in a White House statement that called the IRGC the Iranian government's "primary means of directing and implementing its global terrorist campaign".
"The US decision is a serious step in the efforts to combat terrorism," a Saudi foreign ministry source was quoted as saying by official news agency SPA.
Riyadh and Tehran support opposing sides in several conflicts including in Syria and Yemen.