"It is time that our government and others in the EU, recognised the realities and welcomed the Iranian Resistance as friends in a common effort to restore democracy and human rights," said Lord Corbett of Castle Vale.
"The unjustified labelling of the People’s Mujahedin Organisation of Iran (PMOI) as a terrorist organisation deprives the people of Iran and the world community of a supporter of peace efforts in the Middle East," said Corbett, who chairs the British Parliamentary Committee for Iran Freedom.
He described the Iranian opposition movement as a "vital ally" of Western efforts to prevent Tehran from developing nuclear weapons, recalling that the group had helped uncover details of Iran’s nuclear activities.
Corbett was speaking at a meeting near Paris with Maryam Rajavi, head of the National Council of Resistance of Iran (NCRI), the group’s political wing, attended by lawyers and lawmakers from Britain’s three main political parties.
The EU placed the PMOI on its list of terrorist organisations in 2002, while the United States classifies both the PMOI and NCRI as terrorist groups.
Rajavi argued at the meeting that a Western policy of "appeasement" has "acted as the greatest impediment to democratic change."
"We offer a secular government based on democratic principles, which respects human rights," she said of her NCRI movement.
Corbett said his group supported "Mrs Rajavi’s view that neither military force nor appeasement is the answer to the threat posed by the Iranian regime," and that "democratic change can be achieved through the Iranian people and their resistance."
Active in the years before the 1979 Iranian revolution, the PMOI was later suppressed and set up headquarters in Iraq where it was protected by Saddam Hussein and carried out cross-border raids into Iran.
The NCRI has been accused of being a leftist Islamic cult, but members insist it is a democratic organisation.
The United Nations Security Council, which could decide on economic sanctions, is expected to meet next week to call on Tehran to comply with an request by the UN’s atomic watchdog to suspend its nuclear programme.