The US has granted "protected status" under the Geneva Conventions to 3,800 members of an Iranian opposition group interned in Iraq.
The People's Mujahideen opposed Iran's Government
This meant that People's Mujahideen's fighters were not considered belligerents during the Iraq war, State Department spokesman Adam Ereli said.
But the new status did not affect the US view that the group was a terrorist organisation, Mr Ereli said.
Iran said the decision undermined US claims to be fighting terrorist groups.
"We have determined that they were not belligerents in this conflict and we are according them the human rights protections consistent with the Geneva Conventions," Mr Ereli said in Washington.
The new status gives the militants access to the Red Cross and the United Nations refugee agency.
But it will not protect any individuals who are suspected of carrying out terrorist acts.
About 3,000 members of the People's Mujahideen were disarmed by the US-led coalition after Iraqi President Saddam Hussein was removed from power last year.
They are being held in Camp Ashraf, northeast of Baghdad.
Tehran wants the militants sent to Iran but human rights organisations say they will face persecution if that happens.
Previously, the Iraqi authorities have said they wanted the group to be expelled.
The controversy highlights the group's rather awkward position, the BBC's Pentagon correspondent Nick Childs says. He adds that what will ultimately happen to the fighters is not clear.
Washington says it is working with the Iraqi government and international organisations to find a solution
Thorn in side
The People's Mujahideen, or Mujahideen-e Khalq, has been a thorn in Tehran's side for more than two decades.
A militant organisation, whose ideology combines elements of both Marxism and Islam, the group based itself in Iraq after being expelled from Iran.
Members then carried out cross-border raids into Iran, which fought a war with Iraq between 1980 and 1988.
Although the group kept out of this year's US-led Iraq war, their bases were bombed by US warplanes but after negotiations they reached a truce with the Americans.