(Adds Iranian reaction)
BRUSSELS, Jan 26 (Reuters) - The European Union agreed on Monday to remove the exiled Iranian opposition group that exposed Tehran's covert nuclear programme in 2002 from a list of banned terrorist organisations.
The EU decision on the People's Mujahideen Organisation of Iran (PMOI) followed a years-long legal row and Iran's state radio immediately branded it an "irresponsible move".
Foreign ministers of the 27-nation EU, which has unsuccessfully tried to persuade Iran to curb nuclear activities suspected as part of a bomb programme, approved the removal of the PMOI from a list of terror groups that includes Palestinian Hamas and Sri Lanka's Tamil Tigers.
The decision follows a number of EU court rulings against its seven-year inclusion on the blacklist.
"What we are doing today is abiding by the resolution of the European court," EU foreign policy chief Javier Solana, the official leading diplomacy with Tehran, told reporters just before the ministers finalised the decision.
In Tehran, the Iranian Foreign Ministry was quoted as saying removal of the ban amounted to encouragement of terrorism.
"It means becoming friends with terrorists," the Students news agency quoted a ministry statement as saying. "Iran believes the European Union lacks legitimacy to fight against terrorists."
The PMOI began as a leftist-Islamist opposition to the late Shah of Iran and has bases in Iraq.
Western analysts say its support is limited in Iran, which denies trying to make a nuclear bomb, because of its collaboration with Iraq during the 1980-88 Iran-Iraq war. It remains banned in the United States.
Maryam Rajavi, president-elect of the PMOI's political wing, the National Council of Resistance of Iran (NCRI), said the delisting was a "stinging defeat for Europe's policy of appeasement" of Tehran and urged Washington to follow.
"The most important part of any change in policy by the new (U.S.) president ... would be the removal of the terrorist label of the PMOI," she said in a statement.
An NCRI spokesman said the PMOI had "tens of millions of dollars of assets, including $9 million in France" which have been frozen in Europe and to which it should now have access.
"The funds will be used to increase our political activities ... including to further disclose the Mullah regime's secret nuclear weapons sites," she added in a telephone interview.
However the decision may not be the end of a years-long saga.
France announced last week an appeal against the December judgment of the European Court of First Instance which called for the delisting of the group, and EU officials stress that court ruling was based on procedure rather than substance.
"This does not mean the court does not think the PMOI is a terrorist group," one EU official said. "We are taking it out for procedural reasons."
The December court ruling said the EU had breached the PMOI's right to self-defence because it did not inform the group of some new information it had used to keep the organisation on the blacklist, which is reviewed every six months.
Major powers in the U.N. Security Council have offered Iran a set of trade, political and technological sweeteners in a bid to persuade it to suspend uranium enrichment, while ratcheting up economic sanctions against its banks and other sectors.
President Barack Obama has signalled a possible closer involvement of the United States in diplomatic efforts in what would be a move away form the longstanding U.S. policy of isolating Iran.
British Foreign Secretary David Miliband insisted that the delisting of the PMOI should have no effect on international diplomacy aimed at persuading Iran to curb uranium enrichment.
"We have to find a way to respect the court judgment ... I think the Iranian standoff with the IAEA (International Atomic Energy Agency) is very clear. During 2009 there will and should be significant focus on this issue. (Additional reporting by Edmund Blair in Tehran, Ingrid Melander and David Brunnstrom in Brussels; Editing by Ralph Boulton)
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