Well, contrary to FReeper mythology, the KLA was never on the State Dept's list of foreign terrorist organizations. The source of the characterization of the KLA as terrorists was U.S. Envoy Robert Gelbard's comments to that effect in February 1998 at press conferences in Begrade and Pristina where he said "[I] condemn the attacks against the police and others by the group that calls itself the UCK [Kosovo Liberation Army]. As I have said before, I consider these to be terrorists actions and it is the strong and firm policy of the United States to fully oppose all terrorists actions and all terrorists organizations".
Gelbard's comments have gone down in U.S. diplomatic lore with Ambassador Glaspie's July 1990 statement to Saddam Hussein that "We have no opinion on your Arab - Arab conflicts, such as your dispute with Kuwait" and Dean Acheson's 1949 (50?)speech in which he left South Korea out of the U.S. security "perimeter".
There is a school of thought that says in both the Korea and Iraq cases, the U.S. remarks caused N. Korea and Hussein to believe they had received a "green Light" to attack and both did. Gelbard's description of the KLA as terrorists is similarly thought by some to have led Milosevic to believe he would be OK to launch a major Serb offensive in Kosovo against "terrorists".
But it was the Serb brutality and atrocities committed during that March 1998 offensive and its follow-on operations aginst not terrorists, but ordinary Kosovar citizens that transformed the KLA from a few hundred extremists and terrorists into a broadly supported popular rebellion against Serb rule with thousands of fighters and tens of thousands of supporters.
Gelbard probably should have known better than to give Milosevic even an indirect "out" for taking action. He already knew of the brutality of Serbian tactics as evidenced by earlier comments at the same press conference when Gelbard said: "We... condemn the violence which is occurring. The official violence, promulgated particularly by the police, we believe accounts for the great majority of the violence which is going on in Kosovo. We feel it is unwarranted and (inaudible). If there are concerns about public security, they could be managed in a much better way, geared to building confidence with the population..."
As a final thought, Gelbard called the KLA terrorists, but then also said the Serbs were responsible for most of the "unwarranted" violence. What does that make the Serbs?