The leadership of Pakistan's ISI spy agency was not involved in planning the deadly 2008 Mumbai attacks, self-confessed plotter David Coleman Headley told a Chicago court on Tuesday.

Headley, who pleaded guilty to 12 terror charges arising out of the attacks on India's financial capital and other unrealised plots, testified that only a handful of ISI agents were involved in the Mumbai plot.

He testified that his main contact at the ISI was a handler identified only as 'Major Iqbal' but that he suspected the major's supervisor, an unnamed colonel, was also involved in the planning.

When asked if he believed that neither the head of the ISI nor its senior leadership were involved, Headley testified "Yes."

"The colonel might have known and someone in the group might have known," Headley said.

The Mumbai attacks, in which 166 people were killed, stalled a fragile four-year peace process between India and Pakistan, two South Asian neighbors and nuclear-armed rivals, which was only resumed in February.

Pakistan's powerful Inter-Services Intelligence (ISI) agency has long been suspected of involvement and three ISI agents were named as co-conspirators by US prosecutors following Headley's 2009 arrest at a Chicago airport.

The trial comes amid a diplomatic crisis as Pakistan struggles to deflect suspicion of official complicity with terrorism after US commandos killed Osama bin Laden in an urban compound only 55 kilometers (35 miles) from Islamabad on May 2 after a decade-long manhunt.

Headley had previously testified that he believed the ISI worked closely with the banned militant group Lashkar-e-Tayyaba (LeT) and detailed his relationship with an ISI handler identified as "Major Iqbal."

However, Headley's testimony on Tuesday supports Pakistan's assertion that the ISI's involvement — if any — was limited to a handful of rogue agents.

Headley is testifying against his childhood friend and alleged co-conspirator, Tahawwur Hussain Rana, in exchange for avoiding the death penalty and extradition to India, Pakistan or Denmark.

The Washington-born son of a former Pakistani diplomat and a US woman, Headley spent two years scouting Mumbai, even taking boat tours around the city's harbor to identify landing sites for the attackers and befriending Bollywood stars as part of his cover.

In a plot that reads like a movie thriller, Headley said he was given a GPS device to locate possible targets, including Mumbai's Taj Mahal Hotel, the eventual site of the attacks in addition to the headquarters of the right-wing political party Shiv Sena.

Rana is accused of providing Headley with a cover and acting as a messenger, with prosecutors alleging he played a behind-the-scenes logistical role in both the Mumbai attacks and another abortive plan to strike Copenhagen.

The Mumbai attacks also left more than 300 people wounded after coordinated strikes on high-profile targets by 10 heavily armed Islamist extremists.

Headley also testified briefly about a plot to kill the head of US defence group Lockheed Martin in retaliation for the drones it built for US forces.

Headley testified that he secretly used Rana's office computer for research on the plot, but dismissed his brief online search there as insignificant.

"My research is more in-depth than Googling someone a couple of times," he testified during cross-examination by Rana's defence attorney.

Headley said he was working on the plot with Ilyas Kashmiri, the commander of the Pakistani-based terrorist organisation Harakat-ul-Jihad al-Islami (HUJI), and a senior member of Al Qaeda.

Rana, a Canadian-Pakistani and Chicago businessman, has denied all charges, and his defense attorneys argue that he was duped by his friend, whom he had met in military school in Pakistan.

Rana's lawyers have sought to undermine Headley's credibility and questioned the twice-convicted drug dealer about an 18-month long treatment for what was diagnosed to be a "mixed personality disorder" in 1992.

Defence attorneys Patrick Blegen and Charles Swift told reporters that Headley was a "master manipulator" and likened him to a "squirrel or a rat who stores things away" to be used at an opportune time.