In a plea bargain with prosecutors, Headley pleaded guilty to 12 counts of conspiracy in exchange for avoiding the death penalty and a promise that he would not to be extradited to India, Pakistan or Denmark.
Prosecutors will therefore ask for a lesser sentence for Headley, but the judge said that was not guaranteed.
Three other men have been charged in the case, including a Pakistani-born Chicago businessman who is being held and two Pakistanis tied to Islamist groups who are not in custody.
"Not only has the criminal justice system achieved a guilty plea in this case, but David Headley is now providing us valuable intelligence about terrorist activities," Eric Holder, the US attorney general, said.
Headley, who formerly lived in Pakistan, switched his plea from not guilty to guilty of providing material support to terrorism and conspiracy to bomb public places in India.
Prosecutors said Headley had made several surveillance trips to India and Denmark.
According to court documents, he passed on information to his contacts with the Pakistan-based group, Lashkar-e-Taiba.
The group has been blamed for organising the Mumbai attacks.
Headley was arrested by FBI agents in Chicago in October while trying to board a plane for Philadelphia.
He is alleged to have told prosecutors that he had been working with Lashkar-e-Taiba since 2002.
Headley changed his name from Daood Gilani in 2006 after he was told by members of Lashkar-e-Taiba that he would be travelling to India to carry out surveillance duties for the group, prosecutors said.
India suspended a four-year-old peace process with Pakistan after the November 2008 attack on Mumbai.
India has demanded action against Pakistani-based fighters, but has signalled it is ready for a new round of talks.