The US has designated Iran's Revolutionary Guard as a foreign terrorist organisation, an unprecedented step by Washington that puts pressure on Tehran and further isolates its regime.
US President Donald Trump announced the move.
"Today, I am formally announcing my administration’s plan to designate Iran’s Islamic Revolutionary Guard Corps, including its Quds Force, as a foreign terrorist organisation," Mr Trump said.
"This unprecedented step, led by the Department of State, recognises the reality 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."
Iran responded quickly by declaring the US a state sponsor of terrorism and designating American forces in the region a terrorist organisation, state media reported.
Foreign Minister Mohammad Javad Zarif also requested that President Hassan Rouhani place the US Central Command on Iran's list of terrorist groups.
Mr Zarif criticised the US decision on Twitter, saying it was made to support Israeli Prime Minister Benjamin Netanyahu before the country's parliamentary election on Tuesday.
"Another misguided election-eve gift to Netanyahu. Another dangerous US misadventure in the region," Mr Zarif said.
Mr Netanyahu thanked Mr Trump in tweets written in Hebrew and English, saying the US President had answered "another important request that serves the interests of our country and the region".
Mr Trump said it was the first time the US had designated the military of another nation as a terrorist group, but the move showed that Iran's actions "are fundamentally different from those of other governments".
The list of such groups includes Al Qaeda, Hezbollah and ISIS.
"If you are doing business with the IRGC, you will be bankrolling terrorism," Mr Trump said. He said further action was coming to combat the group and all entities sanctioned by the US.
The IRGC is a branch of Iran's armed forces with responsibility for protecting the Islamic republic system, whereas the regular military has the traditional task of defending the nation.
Saudi Arabia and Bahrain added the IRGC to their terrorism lists in October last year. Bahrain, which has accused Iran of supporting anti-government groups in the kingdom, was among the first countries to welcome the US decision.
US officials described the designation as historic and said it came after a months-long inter-agency review, which took into account the IRGC's security threat and its reach in Iraq, Lebanon, Syria, Yemen, and across the Middle East.
"The President has long believed in this designation," an official said. "It is an unprecedented action. We are mindful of security concerns."
They said the move would pave the way for criminal prosecutions of the group’s members and its backers.
US Secretary of State Mike Pompeo has supported the tougher line taken by the Trump administration against Tehran and has advocated that message on his visits to the region.
He said the IRGC was responsible for acts of terror across the world and warned other nations they could face sanctions if they do business with Tehran, as a result of the designation.
“The IRGC amounts to a significant piece of the Iran economy through sheer kleptocracy. It is deeply enmeshed in the economy," he said.
Mr Pompeo said the move sent a clear message to Tehran. "The leaders of Iran are racketeers, not revolutionaries," he said.
He declined to confirm if the move would make Quds force commander Qassem Soleimani a military target in the same manner as ISIS leader Abu Bakr Al Baghdadi.
But Mr Pompeo said it would make it clear to Lebanese leaders, including Parliament Speaker Nabih Berri, that the US would not tolerate ties with Iran from anyone in the country.
Senior sources told The National on Saturday that the US is considering sanctions against senior members of Mr Berri's Amal party, which is allied with Hezbollah and Tehran.
The designation comes one year after Mr Trump announced he was withdrawing the US from the 2015 Iran nuclear deal signed by Washington, Tehran and four other world powers.
The US administration has since increased sanctions on Iran, cutting off vital revenue and diminishing its oil and gas exports.
Washington criticised the nuclear deal for failing to tackle Iran's destabilising ventures across the Middle East, its support for proxy forces such as Hezbollah, and for not including the country’s ballistic missile programme in the agreement.
The US has blacklisted dozens of entities and people for affiliations with the IRGC already. In 2007, the US Treasury designated the Quds Force for supporting extremism.
Iran said it would issue a "crushing" response if the US went ahead with the designation.