The designation of the United Self-Defense Forces as a foreign terrorist group was based on "an exhaustive review of the AUC's violent activities over the past two years," Powell said in a statement, using the Spanish initials for the group.
"I hope this will leave no doubt that the United States considers terrorism to be unacceptable, regardless of the political or ideological purpose," Powell said.
Financial support for the group is illegal under the designation and American financial institutions are required to block its assets.
Powell said the AUC has carried out numerous acts of terrorism, including the massacre of hundreds of civilians, the forced displacement of entire villages and the kidnapping of political figures.
"Many of these massacres were designed to terrorize and intimidate local populations so the AUC could gain control of those areas," he said.
In all, 31 groups, including FARC and ELN of Colombia, are designated as foreign terrorist groups.
Powell's three-day trip to Peru and Colombia, where democracy has been under fire, was designed to show that U.S. interests in the hemisphere go beyond Mexico, where President Bush's attention has been focused.
Powell will attend an Organization of American States foreign ministers meeting on Tuesday to approve a charter setting democratic standards for the region.
Powell's meeting with President Alejandro Toledo will mark U.S. support for Peru's democratic transition. Toledo's election followed the 10-year presidency of Alberto Fujimori, forced from office by a corruption scandal after winning a third term in widely criticized elections.
Peru is expected to ask the United States to resume U.S.-backed anti-drug flights that were suspended after the Peruvian air force mistakenly shot down an American missionary plane in April, killing a woman and her infant daughter. The plane was initially identified as a possible drug flight by a CIA-operated surveillance plane.
On Wednesday, Powell will meet with Colombian President Andres Pastrana and other leaders in Bogota to discuss the country's guerrilla war and anti-drug efforts under a $1.3 billion U.S. aid package.
Colombia is the world's largest producer of cocaine. Leftist guerrillas partly finance their 37-year insurgency by protecting drug traffickers. Colombia's poverty is seen as contributing to both the insurgency and the trafficking.
Much of the U.S. aid has been for Colombian military anti-drug battalions. Some Democrats oppose it because of the military's link to human rights violations, questions of the safety of aerial drug eradication and fears the United States will be drawn deeper into the Colombian conflict.
Some Republicans say the United States should directly hlp Colombia fight the guerrillas, instead of limiting military support to anti-drug units.
Shortly after returning to Washington, Powell will testify in Congress on behalf of the administration's proposal for $882 million in additional aid for the Andes.
Mr. Bush's election had raised hopes for more U.S. attention on Latin America, a region he once said "often remains an afterthought of American foreign policy." In his campaign, he pledged to look to the Americas "as a fundamental commitment of my presidency."
But the administration was reticent about helping Argentina with its debt crisis and has shown little initiative on Colombia beyond continuing the Clinton administration's approach. Immigration talks with Mexico have excluded other Latin American nations.
"I think that people in a number of countries are confused and wondering what the U.S. message is," said George Vickers, executive director of the liberal Washington Office on Latin America.
Myles Frechette, a Bush supporter and former ambassador to Colombia, said problems in other areas, such as the Middle East and Balkans, have diverted the administration's attention.
"I think in these eight months, the administration has found the world is a lot more complicated than they had thought and that the U.S. plays a far more indispensable role than they thought," he said.
Powell has traveled to Africa, Asia and Europe, but his only visit to Latin America was with Mr. Bush on the president's day trip to Mexico.
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