A New York federal judge has unfrozen funds withheld by US President Donald Trump's administration for a US$16 billion project to overhaul critical rail infrastructure in New York and New Jersey.

The Gateway Project will build a new commuter rail tunnel between Manhattan and New Jersey and repair a century-old tunnel used by more than 200,000 travellers and 425 trains daily.

The existing Hudson Tunnel, heavily damaged by Hurricane Sandy in 2012, needs frequent emergency repairs that disrupt travel on the nation’s most heavily used passenger rail line.

US District Judge Jeannette Vargas in Manhattan handed down the temporary ruling hours after New York and New Jersey said construction would halt for lack of funding.

Vargas said the states were likely ‍to succeed on their claims that a Trump administration directive freezing the funds was arbitrary and ran afoul of legal procedures for making policy ⁠changes.

New Jersey acting attorney general Jennifer Davenport and New York attorney ‍general Letitia James issued statements praising the ruling.

“The Trump administration must drop this campaign of political retribution immediately and must allow work on this vital infrastructure project to continue,” Davenport said.

The states said in a January 3 lawsuit that Trump’s Republican administration had frozen the funds in a “brazen act of political retribution” against their Democratic leaders.

They said a work stoppage would hold up a crucial infrastructure project, damage their economies and saddle them with costs from securing idled construction sites.

The Trump administration has withheld US$205 million ‌in reimbursements for the project since October 1.

Trump has reportedly demanded that Washington Dulles Airport and New York's Penn Station be renamed for him in exchange for unfreezing the funds, drawing strong criticism from Democrats.

He told reporters on ‍Friday that he had not proposed renaming Dulles or Penn Station. Trump did not ‌comment on Vargas' decision. (Reuters)