The Associated Press
Legislators approved the decision of the Court of Appeal, which ruled in May that the group should no longer be listed as a proscribed organization.
The decision will give it more freedom to organize and raise money in Britain.
"After so many years of waiting, so many years of campaigning, so many setbacks and frustrations, at last our government has seen the light," said Baroness Angela Harris, a House of Lords peer who backed the move.
The People's Mujahedeen of Iran, or PMOI, is considered a terrorist organization in the United States and European Union, and it was banned in Britain in 2001.
Although the group participated in Iran's Islamic Revolution, it later became opposed to the clerical government. Members of the group moved to Iraq in the early 1980s and fought Iran's Islamic rulers from there until the United States invaded in 2003. American troops have since disarmed thousands of PMOI members.
The group had argued that it renounced violence in 2001 and should no longer be listed as a terrorist organization.
British Home Office minister Tony McNulty said on Monday that the government had unsuccessfully appealed the Court of Appeal's ruling because of the group's violent past.
"The PMOI admitted responsibility for a number of horrendous crimes carried out against the Iranian people, both civilian and military targets," McNulty said.
He said legislation to remove the group from Britain's list of proscribed organizations would come in force this week.
Britain's list also contains organizations such as al-Qaida, Hezbollah and the Kurdistan Workers' Party, or PKK.
Supporters of the PMOI said they now expect the EU to review the group's status following the decision by a British court and lawmakers.
"I think it would be strange if they did not follow our lead," Lord Steven Bassam said.
