Turns out the FBI knew in detail about Headley's activities in Pakistan (not surprising, considering the fact he was a US agent/informer), but let him travel freely around the world and complete his mission anyway.
From the Washington Post:
"In three interviews with federal agents, Headley's wife said that he was an active militant in the terrorist group Lashkar-i-Taiba, had trained extensively in its Pakistani camps, and had shopped for night-vision goggles and other equipment, according to officials and sources close to the case. The wife, whom ProPublica is not identifying to protect her safety, also told agents that Headley had bragged of working as a paid U.S. informant while he trained with the terrorists in Pakistan, according to a person close to the case."
Indian TV report
[ame=http://www.youtube.com/watch?v=EtgY67FTJ2w&feature=player_embedded#]YouTube - FBI was warned about key figure in Mumbai terror attack[/ame]