The madrassa was the first school to be sanctioned by the United States, the department said a statement.
The Jamia Taleem-Ul-Quran-Wal-Hadith Madrassa, also known as Ganj Madrassa, is in Peshawar. The statement said charitable donations intended for educational efforts at the school were being diverted to support violent acts.
In doing so, the Treasury Department said it generally does not sanction Islamic schools, which it said "often play an essential role in improving literacy and providing humanitarian and developmental aid in many areas of the world, including Pakistan."
The al-Qaida leader, Siddique Kathio Azmarai, was said to be a "significant financial facilitator" for the terrorist organization who also had acted as a courier for other al-Qaida officials, including Khalid Sheik Mohammed.
Treasury said he also had helped the family of deceased al-Qaida leader Osama bin Laden with their travel, lodging and medical needs.
The U.S. sanctions freeze any assets of the school or Azmarai under U.S. jurisdiction and prohibit U.S. citizens from doing business with them.