Judge Sam Sparks issued an injunction in favor of Planned Parenthood, ruling its lawyers had shown it would likely prevail in its lawsuit against officials in the state's Heath and Human Services Department.
In December, Texas cut off Medicaid funds to some Planned Parenthood groups. Sparks presided over a three-day hearing in mid-January and issued his ruling Tuesday.
The state's decision, by the department's Inspector General Stuart Bowen Jr., came "without any evidence indicating an actual program violation warranting termination," Sparks wrote in his 42-page ruling
Texas Attorney General Ken Paxton said he would appeal the ruling.
"Today's decision is disappointing and flies in the face of basic human decency," he said.
Paxton cited a video that was secretly recorded by the Center for Medical Progress, an anti-abortion group, as evidence that Planned Parenthood was selling fetal tissue -- a charge the medical provider has denied.
"No taxpayer in Texas should have to subsidize this repugnant and illegal conduct," Paxton said.
Sparks said there is no proof in the video that Planned Parenthood violated ethical or medical standards. He also found no evidence that the state showed Planned Parenthood altered abortions to procure fetal tissue for research.
The two anti-abortion activists who recorded the secret video were indicted for using fake identification in January 2016 by a grand jury in Houston. The charges were dismissed five months later.
The same grand jury cleared Planned Parenthood of any wrongdoing.
About 12,500 of the 4.3 million Texans on Medicaid get health services from Planned Parenthood.
As a candidate, President Donald Trump said he would work to defund Planned Parenthood.
And US House Speaker Paul Ryan announced in January that Republicans will move to strip all federal funding for Planned Parenthood as part of the process they are using to dismantle Obamacare. Congressional Republicans have tried for years to zero out all federal funding for Planned Parenthood because the group provides abortion services.
But the group says federal law prevents it from using funds to pay for abortions. It says the money, most of it from Medicaid, goes to repay the costs of preventive health care, birth control and pregnancy tests.