The US has said it is "highly likely" that North Korea is involved in state-sponsored drugs trafficking.
Australia says it found heroin on a North Korean-manned ship
The claims, in a State Department report, could add to tensions between the two countries, already in a stand-off over the North's nuclear plans.
The report cited as evidence the 2002 seizure of a ship allegedly carrying up to 125kg (275 pounds) of heroin, and a North Korean party worker's testimony.
The North has denied several previous claims it is involved in drugs trading.
US officials and academics have long suspected North Korea was engaging in drugs trafficking as a means of earning hard currency to shore up its failing economy.
But this year's report from the State Department is the strongest-worded yet from the US administration.
It builds on comments by US President George W Bush in September that the US was "increasingly convinced" that North Korea was actively involved in drugs trafficking.
"State trading of narcotics is a conspiracy between officials at the highest levels of the ruling party/government and their subordinates to cultivate, manufacture, and/or traffic narcotics with impunity through the use of, but not limited to, state-owned assets," the 2003 International Narcotics Control Strategy Report (INCSR) said.
"Law enforcement cases over the years have not only clearly established that North Korean diplomats, military officers, and other party/government officials have been involved in the smuggling of narcotics, but also that state-owned assets, particularly ships, have been used to facilitate and support international drug trafficking ventures," it continued.
The report said that the incident involving the Pong Su, a Tuvalu-registered North Korean-owned ship, which was apprehended by the Australian authorities last year for carrying heroin, was the first indication that North Korean enterprises are trafficking narcotics outside North Korean territorial waters.
The report also cited allegations by unnamed defectors that North Korea was engaged in large-scale opium poppy production.
"A defector identified as a former North Korean high-level government official testified in May 2003 before the US Senate that poppy cultivation and heroin and methamphetamine production were conducted in North Korea by order of the regime," the report said.
"The government then engaged in drug trafficking to earn large sums of foreign currency unavailable to the regime through legal transactions," it said.
The US at the weekend finished taking part in six-party talks with North Korea on its nuclear weapons programme. The parties only agreed to meet again.