By Mehreen Zahra-Malik

ISLAMABAD (Reuters) - The U.S. State Department has named a self-proclaimed Pakistani charity as a "foreign terrorist organization", a status that freezes any assets it has under U.S. jurisdiction.

Jamaat-ud-Dawa calls itself a humanitarian charity but is widely seen as a front organization for the Lashkar-e-Taiba (LET), a Pakistan-based group accused of orchestrating attacks in India, including the 2008 Mumbai attack that killed 166 people.

The designation comes as NATO troops in Afghanistan are drawing down, and regional rivals Pakistan and India compete with each other for influence with Kabul.

Some fear the competition may spill into open conflict between the two nuclear-armed nations, who have fought three wars since independence.

Historically, Pakistan has used militant groups like LET to mount covert attacks on Indian soil, something the current government has vowed will not happen again.

Jamaat-ud-Dawa's listing will prohibit U.S. entities or citizens from dealing with the organization, but will probably have little practical effect on its operations or fund raising.

The United Nations said in 2008 that Jamaat-ud-Dawa was a front for LET and Pakistani authorities vowed to crack down.

But Jamaat-ud-Dawa continues to operate openly in Pakistan. Its leader holds public rallies and gives interviews. The group says it is currently carrying out charitable work in the remote border region of North Waziristan to help residents displaced by military operations.

"In December 2001, the Department of State designated LET as a Foreign Terrorist Organization. Since the original designation occurred, LET has repeatedly changed its name in an effort to avoid sanctions," the State Department said in a statement on Wednesday.

"More specifically, LET created Jama'at-ud-Dawa as a front organization, claiming that the group was an 'organization for the preaching of Islam, politics, and social work'."

The U.S. Treasury Department separately announced that it was designating two LET leaders, Nazir Ahmad Chaudhry and Muhammad Hussein Gill, as "specially designated global terrorists", imposing economic sanctions on them.

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Yahya Mujahid, a spokesman for Jamaat-ud-Dawa, rejected the allegations.

"We are a welfare organization working for the people of Pakistan and we have nothing to do with the LET or terrorism," he said.

"We have already been cleared by the Lahore High Court and Supreme Court of Pakistan, therefore the U.S. decision does not matter for us."

Mujahid was referring to attempts by the Pakistani government to prosecute several Jamaat leaders and ban the organization after the 2008 Mumbai attacks. Pakistani courts rejected the moves.

In 2012, the United States offered a $10 million reward for information leading to the arrest of Hafiz Saeed, who founded LET. He claims he has long abandoned its leadership and now heads Jamaat-ud-Dawa.

Chaudhry, considered a close aide of Hafiz Saeed, has served as LET's vice-president, a member of its central leadership council and director of its public relations department.

Gill is one of the founders of the Lashkar-e-Taiba and has served as its chief financial officer for years.

As a result of Wednesday's action, any assets belonging to Gill and Chaudhry and their group that come under U.S. jurisdiction are frozen. In addition, U.S. citizens and firms are barred from any dealings with those designated.

(Additional reporting by Mubasher Bukhari in Lahore; Editing by Katharine Houreld)