The group had been blacklisted as a terrorist organisation by the EU since 2002, but waged a long legal battle in the EU's court of justice to reverse that decision.
Several EU court decisions went in the group's favour. One ruling held that the EU had failed to properly explain why it froze the assets of the Paris-based group.
Javier Solana, the EU's foreign policy chief, said: "What we are doing today is abiding by the decision of the court. There is nothing we can do about the decision."
The PMOI, also known as the Mujahedeen-e-Khalq, is the military wing of the National Council of Resistance of Iran.
The council, which has said it is dedicated to a democratic, secular government in Iran, was founded in Iran in the 1960s and helped followers of Ayatollah Ruhollah Khomeini overthrow United States-backed Shah Mohammed Reza Pahlavi in 1979.
But the Mujahedeen-e-Khalq fell out with Khomeini, and thousands of its followers were killed, imprisoned or forced into exile.
It launched a campaign of assassinations and bombings against Iran's government as a result.
The PMOI has long tried to shed its 'terrorist' tag, despite a series of bloody anti-Western attacks in the 1970s and nearly 30 years of violent struggle against Iran's Islamic establishment.
The group said it renounced violence in 2001 and has not kept any arms since 2003.
Mohammad Safaei, a spokesman at the Iranian embassy in Brussels, said he could not comment on the decision because it had not yet been officially relayed to Tehran.
The court-mandated move is likely to complicate difficult ties with Iran just as the EU is trying to negotiate with Tehran over its nuclear programme.
The EU and the US fear Iran is building atomic weapons, an accusation that Iran denies.
The PMOI has been on the US' state department's terrorist list since the mid-1990s.
In 1986, the group established the Ashraf camp in Iraq for about 3,500 members, which its forces used to launch cross-border attacks into Iran.
After US-led forces overthrew Saddam Hussein, the Iraqi president, in 2003, US troops removed the Iranian group's weapons and confined its fighters to the camp.