He was arrested in July and charged with failing to register as a foreign government agent.
The Pakistan government has denied any knowledge of Mr Fai's activities.
Kashmir is at the centre of its row with India.
Mr Fai, who was born in Indian-administered Kashmir, and another man, Zaheer Ahmad, a US citizen of Pakistani origin, were charged with using at least $4m (£2.5m) in Pakistani funds in a bid to influence the US position on the disputed territory of Kashmir, prosecutors said.
Prosecutors say Mr Ahmad recruited people to act as donors who would give money to the council which really was coming from the Pakistani government. He is not under arrest and is believed to be in Pakistan.
"For the last 20 years, Mr Fai secretly took millions of dollars from Pakistani intelligence and lied about it to the US government," US Attorney Neil MacBride said in statement.
"As a paid operative of ISI (Pakistan's Inter-Services Intelligence spy agency), he did the bidding of his handlers in Pakistan while he met with US elected officials, funded high-profile conferences, and promoted the Kashmiri cause to decision-makers in Washington."
Correspondents say Mr Fai's guilty plea comes at a time when relations between Washington and Islamabad have worsened.
The US said Mr Fai's Pakistani handlers funnelled millions of dollars from the ISI through a front group, the Kashmiri American Council.
Officially, the Kashmiri American Council had a much smaller budget and it said that it received no foreign grants.
The group contributed money to US election campaigns, helped fund conferences and other efforts, including meetings with White House and state department officials, the US alleges.
Kashmir has been a flashpoint between India and Pakistan for decades. Both countries claim the territory in its entirety and have fought two of their three wars over it.