Trump said in a statement that the "unprecedented" move "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".
"Businesses and banks around the world now have a clear duty to ensure that companies with which they conduct financial transactions are not conducted with the IRGC in any material way", he told reporters.
US Secretary of State Mike Pompeo, a strident critic of Iran, confirmed the new designation would take effect one week from Monday. The move would be the first such designation by any US administration of an entire foreign government entity.
The Council denounced the US decision as "illegal and dangerous" and said the USA government would be responsible for all "dangerous repercussions" of its decision.
Tensions between the two countries have grown since Mr Trump pulled the United States out of a 2015 nuclear deal with Tehran last May and reimposed sanctions that had crippled Iran's economy.
It is the first time Washington has formally labelled another country's military a terrorist group. It followed the US announcement that it has designated Iran's Revolutionary Guard as a foreign terrorist organization.More news: Kirstjen Nielsen to resign as Homeland Security Secretary
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With Israel's election to take place on Tuesday, Netanyahu is likely grateful for the latest public show of USA support for his government.
"IRGC Qods Force activity has been uncovered and disrupted in Germany, Bosnia, Bulgaria, Kenya, Bahrain, Turkey, and others", the White Hosue disclosed in announcing the designation.
"The IRGC is the Iranian government's primary means of directing and implementing its global terrorist campaign", Trump said in a statement.
In 2007, the US Treasury designated the IRGC's Quds Force, the unit in charge of operations overseas, "for its support of terrorism", and has described it as Iran's "primary arm for executing its policy of supporting terrorist and insurgent groups".
Military officials cautioned the designation could incite violence against U.S. forces in the Middle East without severely impacting Iran's economy.
Israel has long considered the Islamic Republic of Iran to be its greatest foe, citing its leaders' hostile rhetoric, suspect nuclear program, development of long-range missiles and support for anti-Israeli militant groups such as Hezbollah.
A statement signed by a majority of lawmakers in support of the bill said any action against Iran's national security and its armed forces was "crossing a red line" and the United States administration would "regret" its decision. Saudi Arabia, the United Arab Emirates, the United States and other countries have accused the guard of supplying the Houthis with long-range missiles, a charge it denies.
Earlier on Monday, Zarif warned the United States that Iran will take retaliatory action if the US designates the IRGC a terrorist organization, Mehr reported. The IRGC is Iran's most powerful security organisation which also has control over large sectors of the country's economy and political system. Tehran has warned that it has missiles with a range of up to 2,000 km (1,242 miles), putting Israel and US military bases in the region within reach.