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.
Wearing a black T-shirt and grey sweatpants, Combs pleaded not guilty in Manhattan before US Magistrate Judge Robyn Tarnofsky to the indictment unsealed on Tuesday.
The judge after a hearing ruled that Combs, who was arrested on Monday, will remain in custody pending trial, as prosecutors sought.
The rapper and producer 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.
Combs was led into the courtroom by members of the US marshals service.
Sitting at the defence table, Combs spoke briefly with lawyer Marc Agnifilo and nodded.
Combs looked to his right, where the Midtown Manhattan skyline was visible through an open window from the 26th floor courtroom, then sighed and looked down.
During arguments concerning continued detention, Agnifilo told the judge that the sexual activity described by the prosecutors was consensual.
"Does everybody have experience with being intimate this way? No. Is it sex trafficking? No. Not if everybody wants to be there," Agnifilo said.
Lawyer Marc Agnifilo insists Sean "Diddy" Combs "is not a criminal". (AP PHOTO)
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.
Prosecutors accused Combs of running a criminal enterprise to facilitate his exploitation of women, dating back at least 16 years, in a case brought by the office of Manhattan US Attorney Damian Williams.
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.
Defence lawyers had sought to have Combs released on $US50 million ($A74 million) bond secured by his Miami home.
Agnifilo acknowledged that Combs has a history of drug use and toxic relationships, and said he was getting treatment and therapy for "things he needs treatment and therapy for," without going into specifics.
"The defendant Sean Combs physically and sexually abused victims for decades," prosecutor Emily Johnson, arguing for continued detention, told the judge.
"He is extremely dangerous to the community."
The next hearing in the case was set for September 24.
The indictment did not specify how many women were alleged victims.
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.
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.
