It comes after a judge temporarily halted the order on Tuesday, only hours after it was signed by President Donald Trump and the memo announcing it was issued by the Office of Management and Budget (OMB).

The judge paused the order until next Monday, after a lawsuit was filed by a group of organisations representing grant recipients.

The new letter issued on Wednesday states”OMB Memorandum M-25-13 is rescinded.”

It is unclear what prompted the apparent U-turn.

In a statement, White House Press Secretary Karoline Leavitt said the administration was still pursuing a freeze.

“This is NOT a rescission of the federal funding freeze. It is simply a rescission of the OMB memo,” she said. “Why? To end any confusion created by the court’s injunction. The President’s EO’s on federal funding remain in full force and effect, and will be rigorously implemented.”

The BBC has asked the White House to clarify how it plans to continue in light of Trump’s decision to rescind the memo as well as the judge’s injunction.

Earlier this week, the acting head of the White House budget office had instructed agencies to “temporarily pause all activities related to obligations or disbursement of all federal financial assistance”.

The office said the move was intended to give the new administration time to assess what grants and loans were in step with their agenda.

But the order prompted widespread confusion about which agencies and programmes would be impacted. An online portal used to access federal funds was briefly taken offline and aid groups warned about a suspension in services.

In response to the latest move, Democrats abruptly shifted a news conference scheduled for Tuesday on Trump’s move to end birthright citizenship to condemn the move to freeze all federal funding instead.

“What they’re basically doing is being lawless – to hurt families, to help their billionaire friends,” Senate Democratic Minority Leader Chuck Schumer told reporters after the order was rescinded.

He added that Republicans will continue to attempt to block future funding, and were only stopped this time due to an “outcry” from the public.

“I don’t think this would have happened, except for the outcry throughout America. And we in the Senate are working with our constituents to show that outcry. We’re going to keep fighting,” he added.

Schumer also said that Trump should next rescind his nominee to lead the OMB.

The order was one of several Trump has issued since taking office, aimed at cutting the size of the government and slashing federal spending. Other orders target transgender rights and the automatic citizenship granted to anyone born in the US.

Also on Tuesday, the Trump administration offered federal workers and option to resign and continue to receive pay for eight months, in an effort to further reduce the size of the federal workforce.

On Tuesday, Leavitt had said the halt in funding would allow governments to cut back spending for “woke” gender issues and diversity programmes.

Several states had reported issues accessing funds through Medicaid, a government health insurance programme for low-income people. The White House later said the programme would not be affected.

It also said Social Security benefits would not be affected, nor would any programme “that provides direct benefits to individuals”, including Supplemental Nutrition Assistance Program, known as SNAP or food stamps.

Although the order has been blocked for now, the White House believes that the original memo served its purpose by prompting federal agencies to take steps to comply with the president’s executive order.

2:41Watch: Almost everything Trump did in his whirlwind first week

The freeze would have stalled funding for “a multitude of important programs that impact people’s lives,” Diane Yentel, president and CEO of National Council of Nonprofits, said in an emergency press call on Tuesday.

It would severely impact food and housing programmes for military veterans, shelters for survivors of domestic violence, and childcare assistance, said Ms Yentel, who represents one of the groups suing the White House over the order.

Congressman Steve Scalise, the Republican House Majority Leader, indicated on Wednesday night that the bill was dead after Trump denounced it.

The short-term funding bill will need to be passed by Congress by the end of week to prevent many federal government offices from shuttering beginning on Saturday.

The bill, known as a continuing resolution, is required because Congress never passed a budget for the 2025 fiscal year, which began on 1 October.

Unless Congress acts, government services ranging from the National Parks Service to Border Patrol will begin closing this weekend.

In posts on his social media site, Truth Social, Trump threatened to help unseat “any Republican that would be so stupid as to” vote in favour of the current version of the bill, which was unveiled on Tuesday by House and Senate leaders.

“If Democrats threaten to shut down the government unless we give them everything they want, then CALL THEIR BLUFF,” he said.

He also called, in a joint statement with incoming vice-president JD Vance, for Congress to raise the debt ceiling, which determines how much the government can borrow to pay its bills, and limit the bill to focusing just on temporary spending and disaster relief.

The 1,500-page bill included more than $110bn (£88bn) in emergency disaster relief and $30bn (£23bn) in aid to farmers. It also included the first pay raise for lawmakers since 2009, federal funds to rebuild a bridge that collapsed in Baltimore, healthcare reforms, and provisions aimed at preventing hotels and live event venues from deceptive advertising.

White House Press Secretary Karine Jean-Pierre issued a statement after Trump came out against the bill, saying: “Republicans need to stop playing politics with this bipartisan agreement or they will hurt hardworking Americans and create instability across the country.”

“Triggering a damaging government shutdown would hurt families,” President Joe Biden’s spokeswoman continued, adding: “A deal is a deal. Republicans should keep their word.”

When asked by CNN on Wednesday night whether the existed deal had officially been scrapped, Congressman Scalise said: “Yes”.

He added that “there is no new agreement right now” and that “there’s still a lot of negotiations and conversations going on”.

It is not clear how Republican House Speaker Mike Johnson plans to proceed.

Mr Musk, who Trump has tasked with cutting government spending in his future administration, lobbied heavily against the existing deal.

On Wednesday night, Mr Musk posted on X: “Your elected representatives have heard you and now the terrible bill is dead. The voice of the people has triumphed.”

There have been 21 US government shutdowns or partial shutdowns over the past five decades – the longest of which was during Trump’s first term when the government was shuttered for 35 days.