In a cabinet meeting, President Trump said the move would trigger “very large” additional sanctions to be announced on November 21.
However, Secretary of State Rex Tillerson later admitted that “the practical effects may be limited”.
President Trump blamed North Korea’s nuclear program, and support for what he called international acts of terrorism.
While announcing the decision at the White House, President Trump said it “should have happened a long time ago”.
In September, the US proposed a range of UN sanctions against North Korea, including an oil ban and a freeze on leader Kim Jong-un’s assets.
It followed North Korea’s sixth nuclear test and repeated missile launches.
North Korea joins Iran, Sudan and Syria on a list of countries that are deemed to have repeatedly provided support for acts of international terrorism.
It has been on the list before but was removed in 2008 by the administration of George W. Bush as part of negotiations on its nuclear program.
The campaign to reinstate it intensified after the American student Otto Warmbier died shortly after he was released from North Korean custody.
Speaking to reporters at a White House press briefing, Rex Tillerson said the designation was meant to hold North Korea accountable for recent actions it has taken “including assassinations outside of their country” and “using banned chemical weapons”.
The secretary of state admitted that given existing sanctions it was “very symbolic” but also said new measures could “disrupt and dissuade some third parties from undertaking certain activities with North Korea”.
“The practical effects may be limited but hopefully we’re closing off a few loopholes with this,” he said.
Kim Jong-un continues to pursue nuclear weapons and missile programs in defiance of UN Security Council sanctions.
The North Korean leader has made no secret of Pyongyang’s plans to develop a missile capable of reaching the US mainland and has claimed to have developed a hydrogen bomb.
Last month, Defense Secretary James Mattis said that the threat of nuclear attack from North Korea was increasing.
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