The embassy accused the 27-nation European Union of "adopting a dual and selective approach towards terrorism" by its decision, which comes after the MKO was taken off the UK's terrorist list last year.
"Such a decision not only holds the EU accountable to the families of the victims in Iran and Iraq, but also holds it responsible for the destructive consequences of the decision undermining the collective efforts of the global community vis-à-vis terrorism," it warned.
It suggested that the decision was political, saying that the EU was expected to keep the MKO on its list of terrorist groups due to "the need for a collective campaign against terrorism as well as the fact that the grouplet has not abandoned its terrorist policy."
"The EU should be aware that a political approach towards terrorism threatening people's security and lives across the globe is totally unacceptable to the public opinion in all countries and will not serve their purpose," the Islamic republic news agency quoted the embassy as saying.
"The EU's decision taken on political grounds will neither alter the grouplet's terrorist and criminal nature nor will cause its crimes to be forgotten nor will decriminalize it," it added in a statement.
The statement said the EU's decision is "blatantly in contrast to the Union's international obligation to fight terrorism and contradicts international anti-terrorist decisions including the UN Resolution 1373."
"Misusing terrorism is a dangerous policy the dire and harmful consequences of which will certainly affect the supporters more than anyone else, as we have witnessed before," it warned.
"The Embassy of the Islamic Republic of Iran in London denouncing the EU's decision, once again points out the negative and harmful consequences of the unreasonable damaging act and calls on the Union to revise the decision as soon as possible," the statement said.