For months, the Ethiopian and Eritrean governments denied Eritreans were involved in the fighting, contradicting testimony from residents and diplomats.
The United States has imposed sanctions on Eritrea's army chief over human rights abuses in Ethiopia's war-scarred Tigray region.
The move by the US Treasury Department against General Filipos Woldeyohannes, chief of staff of the Eritrean Defense Forces (EDF), comes amid reports that Eritrea has deployed reinforcements to parts of Tigray as fighting escalates.
Forces under Filipos' command are responsible for "massacres, looting, and sexual assaults," the Treasury Department said in a statement.
Eritrea shares a border with Ethiopia where the government of Prime Minister Abiy Ahmed is facing international criticism for concealing that Eritrean forces were used in Tigray.
Eritrea angrily rejected what it called "utterly baseless allegations and blackmail."
"This is not, indeed, the first time for the US Administration to float such baseless smear campaigns against Eritrea," the foreign ministry said.
"In the circumstances, Eritrea calls on the US Administration to bring the case to an independent adjudication if it indeed has facts to prove its false allegations."
The Treasury Department said any property or interests of Filipos in the United States would be frozen and US citizens are barred from conducting any business with him.
US Secretary of State Antony Blinken expressed concern that large numbers of EDF have re-entered Ethiopia after withdrawing in June.
He called on the UN Security Council and members of the international community to "come together to push for a peaceful resolution of this ongoing conflict."
Abiy Ahmed sent troops into Tigray last November to topple the regional ruling party, the TPLF.
The 2019 Nobel Peace Prize winner said the move came in response to TPLF attacks on federal army camps.
For months, the Ethiopian and Eritrean governments denied Eritreans were involved in the fighting, contradicting testimony from residents, rights groups, aid workers, diplomats and even some Ethiopian civilian and military officials.
Abiy finally acknowledged the Eritreans' presence in March while speaking to lawmakers, and vowed soon after that they would leave.
Eritrea itself vowed to pull out of the region in April, but that never fully happened.
The conflict in northern Ethiopia has killed thousands and pushed hundreds of thousands of people into famine-like conditions, according to the UN.