* Mujahadin-e Khalq calls for overthrow of Iran's government
* Group's leader says decision a 'blow' to Tehran
* U.S. official denies star lobbyists swayed decision
By Andrew Quinn
NEW YORK, Sept 28 (Reuters) - The U.S. State Department on Friday formally removed the Iranian dissident group Mujahadin-e Khalq from its official list of terrorist organizations, but underscored serious concerns about the group which is seeking to recast itself as an Iranian opposition force.
Secretary of State Hillary Clinton took the decision, effective on Friday, in view of the MEK's public renunciation of violence, the absence of confirmed acts of terrorism by the MEK for more than a decade, and their cooperation in the peaceful closure of their paramilitary base in Iraq, the State Department said in a statement.
"With today's actions, the Department does not overlook or forget the MEK's past acts of terrorism, including its involvement in the killing of U.S. citizens in Iran in the 1970s and an attack on U.S. soil in 1992," the statement said.
"The Department also has serious concerns about the MEK as an organization, particularly with regard to allegations of abuse committed against its own members."
Clinton was in New York this week for a meeting of the U.N. General Assembly. Iran on Thursday blamed the MEK, which it called "a terrorist sect," for accosting a senior Iranian diplomat in New York and condemned the U.S. decision remove the group from the terrorism list.
The MEK's Paris-based leader Maryam Rajavi, who has sought to rebrand the group as a potential opposition force in Iran, welcomed the decision.
"This designation was a gift to the mullahs' (clerical) regime, and removing it is a major blow because they understand better than anyone else the potential of the movement to operate and flourish in Iran," she told Reuters in an interview.
"This decision should put an end to a policy of appeasement which has existed for the past 15 years, and it has once again proven that wherever there is a fraction of freedom and justice our resistance will be the victorious one."
But a senior U.S. official, briefing reporters after Clinton's decision was announced, said Washington did not see the group as viable opposition or democratic movement.
"We have no evidence and we have no confidence that the MEK is an organization that can promote democratic values that we would like to see in Iran," the official said. "They are not part of our picture in terms of the future of Iran."
Officials said last week that Clinton had decided to remove the MEK from the terrorism list, but the formal announcement was made only after appropriate notification of Congress.
The U.S. decision comes after years of intense lobbying by the MEK, which had seen many of its members stranded in Iraq as the group fell out of Baghdad's favor after Saddam Hussein's downfall in 2003.
The group marshalled the support of dozens of members of Congress as well as political, government and media notables.
Public figures who have endorsed the MEK's campaign included former CIA directors R. James Woolsey and Porter Goss, former Homeland Security Secretary Tom Ridge, former FBI Director Louis Freeh, and Mitchell Reiss, a former State Department official who is a top foreign policy adviser to Republican presidential candidate Mitt Romney.
Prominent Democratic Party figures who have supported the MEK have included former Pennsylvania and Vermont Governors Ed Rendell and Howard Dean. People familiar with its activities said that the MEK had paid generous fees to some of those who made speeches in support of its de-listing.
A senior U.S. official dismissed suggestions that the lobbying campaign had played a role in the group's rehabilitation.
"These decisions are made on the merit and not made to appease any group of lobbyists no matter how famous they are," the official told reporters.
"The United States government is not going to take anyone off the list if it genuinely believes that they pose an imminent threats, that they are going to commit terrorist acts, or that they are somehow wedded to violence."
The United States had repeatedly said its decision on the MEK's terrorist designation hinged partly on the group's remaining members leaving Camp Ashraf, an Iraqi base where they had lived for decades, and moving to a former U.S. military base in Baghdad from which they were expected to be resettled overseas.
Officials said this month that the final large group of dissidents had moved from Camp Ashraf to the new location, ending a long standoff with Iraqi authorities.
The group, also known as the People's Mujahideen Organization of Iran, calls for the overthrow of Iran's clerical leaders and fought alongside Saddam's forces in the Iran-Iraq war in the 1980s. It also led a guerrilla campaign against the U.S.-backed Shah of Iran during the 1970s, including attacks on American targets.
Removal from the list means Washington will no longer block the group's property and interests in property in the United States and that U.S. entities may engage in transactions with the MEK without obtaining a license.