Current research funds worth about $131m will not be affected.
Allowing federal funding of human embryonic stem cell research was one of Obama's first acts upon taking office last year, overturning predecessor George Bush's limitations on the science.
Judge Royce Lamberth ruled on Monday in favour of a coalition of groups that had filed a lawsuit in June seeking a temporary injunction on funding of the research.
The coalition had argued that guidelines issued by Obama in March 2009 on stem cell research violated a law banning the use of federal funds to destroy human embryos - to which the judge agreed.
"[Embryonic stem cell, or ESC] research is clearly research in which an embryo is destroyed," Lamberth wrote in a 15-page ruling.
"To conduct ESC research, ESCs must be derived from an embryo. The process of deriving ESCs from an embryo results in the destruction of the embryo. Thus ESC research necessarily depends upon the destruction of a human embryo."
The coalition's suit against the National Institutes of Health (NIH), backed by some Christian groups opposed to embryo research, also argued that the NIH policy took funds from researchers seeking to work with adult stem cells.
On Tuesday Bill Burton, the deputy press secretary, said Obama "put forward stringent ethical guidelines, and he thinks that his policy's the right one".
Burton said the administration was exploring all avenues "to make sure that we can continue to do this critical lifesaving research".
In 1996, the US congress enacted legislation known as the Dickey-Wicker amendment, banning federal funding for research in which human embryos are either destroyed or discarded.
|Barack Obama approved an expansion to stem cell research upon taking office last year [EPA]
Bush, the former US president, issued a directive in 2001 banning federal funding for research into stem lines created after that date.
But Obama, fulfilling a campaign promise, signed an executive order last year to expand research that supporters believe could uncover cures for serious ailments from diabetes to paralysis.
However the Obama administration argued that the research does not require disposal or destruction of the embryos, which were created for in-vitro fertilisation treatments but never used.
Lamberth rejected that distinction in his ruling on Monday.
Researchers believe that stem cells, so-called because they are the foundation for all human cells, provide two promising avenues for scientists.
Firstly, they can be used for research that cannot be performed inside the body.
But scientists believe they can also coax the foundational cells into cardiac, pancreatic or brain cells to replace damaged or infected cells and allow tissue or organs to
There are three types of stem cells currently being examined for their potential medical research value.
Embryonic stem cells, which are extracted from human embryos; adult stem cells, which are taken from the body or from elements discarded after birth, such the umbilical cord; and induced pluripotent stem cells - adult stem cells that have been
genetically modified to resemble embryonic stem cells.
In reversing the ban put in place by his predecessor, Obama pointed to the potential breakthroughs the research could yield, and he rejected the "false choice" between sound science and moral values.