Combs, 54, used the business empire he controlled, including his record label Bad Boy Entertainment, to transport women as well as male sex workers across state lines to take part in recorded sexual performances called "Freak Offs" in which the music mogul would watch, prosecutors said.
Combs, wearing a black T-shirt and grey sweatpants, pleaded not guilty to the charges during an initial court appearance before US Magistrate Judge Robyn Tarnofsky in Manhattan after being led into the courtroom by members of the US marshals service.
The judge is expected to decide whether Combs should remain in custody pending trial.
The rapper and producer was arrested in Manhattan on Monday night.
Combs faces a mandatory minimum 15-year prison sentence and up to life behind bars if convicted of the three felony counts: racketeering conspiracy, sex trafficking and transportation to engage in prostitution.
Lawyer Marc Agnifilo insists Sean "Diddy" Combs "is not a criminal". (AP PHOTO)
Upon sitting down at the defence table, Combs spoke briefly with lawyer Marc Agnifilo and nodded.
Combs then looked to his right, where the Midtown Manhattan skyline was visible through an open window from the 26th floor courtroom.
Combs then sighed and looked down.
The office of Manhattan US Attorney Damian Williams, which brought the charges, said in a court filing that the stiff potential sentence could give Combs incentive to flee.
Prosecutors have asked Tarnofsky to order Combs to remain detained pending trial.
Defence lawyers are asking to have him released on $US50 million ($A74 million) bond secured by his Miami home.
Prosecutors accused Combs of running a criminal enterprise to facilitate his exploitation of women, dating back at least 16 years.
According to the indictment, Combs enticed women by giving them drugs such as ketamine and ecstasy, financial support or promises of career support or a romantic relationship.
Combs then used surreptitious recordings of the sex acts as "collateral" to ensure that the women would remain silent, and sometimes displayed weapons to intimidate abuse victims and witnesses, prosecutors said.
It contained no allegation that Combs himself directly engaged in unwanted sexual contact with women although he was accused of assaulting them by punching, kicking, dragging and throwing objects.
Also known during his career as P Diddy and Puff Daddy, Combs founded Bad Boy records and is credited with helping turn rappers and R&B singers such as Mary J. Blige, Faith Evans, Notorious BIG and Usher into stars in the 1990s and 2000s.
Agnifilo on Monday expressed disappointment with the "unjust" prosecution of his client, calling Combs "an imperfect person" but "not a criminal".
Combs is the highest-profile music industry figure charged with sexual misconduct since R&B singer R Kelly was sentenced to a combined 31 years in prison after being convicted in New York in 2021 and Chicago in 2022 sex trafficking, racketeering, child sex crimes and other counts.
Prosecutors said Combs and his associates used bribery and violence such as arson and kidnapping to try to keep his conduct secret.
Prosecutors said Combs' employees helped arrange the "Freak Offs" by booking hotel rooms and buying controlled substances and other items used during sex, according to the indictment.
During raids of his homes in Los Angeles and Miami Beach, Florida six months ago, authorities found drugs and 1000 bottles of baby oil and lubricant, along with AR-15 rifles with defaced serial numbers, the indictment said.
