US Attorney Michael Garcia said the guilty plea was "a triumph" for the international rule of law and emerging democracy in Afghanistan.
Baz Mohammad was identified by President George W Bush as one of the world's most-wanted drug barons.
Mohammad is accused of heading an international organisation responsible for smuggling more than US$25 million worth of heroin into the US and other countries since 1990. He could face a maximum sentence of life in prison.
Mohammad allegedly told members of his organisation that selling heroin in the United States was an act of "jihad," or holy war, because they were taking Americans' money for a product that would kill them.
Mohammad also allegedly had close links to the former Taliban regime in Afghanistan that was ousted from power by US-led forces in 2001.
The indictment accuses his organisation of using heroin proceeds from the United States for the Taliban.
He is also believed to have had ties with several other Islamic extremist groups.
Afghan President Hamid Karzai authorised Mohammad's unprecedented extradition to the United States in October 2005.