A United States federal judge has ruled that a civil settlement reached between US President Donald Trump and his own Department of Justice was unlawful.

The ruling by US District Judge Kathleen Williams on Monday broadly characterised the situation as self-dealing.

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Trump had launched the $10bn lawsuit against the Internal Revenue Service (IRS) in January, accusing the agency of not properly preventing the leak of his tax returns during his first term as president.

The DOJ subsequently reached a deal with Trump to allocate a $1.8bn settlement to a fund to compensate what the administration described as victims of government “weaponisation” and “lawfare”.

The settlement also gave Trump sweeping tax protections.

In her ruling, Williams said Trump and the Department of Justice were not truly adverse to each other in the litigation, as is required in civil lawsuits under the US Constitution.

“The nature of the suit itself and the conduct of the Parties and counsel from its filing make plain that this was an attempt to use the Court to provide some legitimacy to an agreement to confer immunity to people and entities affiliated with the President and to earmark billions of dollars from American taxpayers to redress grievances not defined in the law,” she wrote.

“Ensuring that our courts are used only for the express purpose created by the Constitution is the obligation of every judge and an obligation that this Court must discharge in light of the matter before it,” she said.

The ruling comes after the administration had already backed away from the so-called “Anti-Weaponization Fund” amid pushback from both Republican and Democratic lawmakers.

Still, it represents a major rebuke to the administration and could prove politically damaging to acting Attorney General Todd Blanche, who faces a confirmation hearing next week.

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Williams suggested that Blanche was working on behalf of both Trump and the DOJ throughout the proceedings, pointing to his “apparent capacity to speak for both Plaintiffs and Defendants”.

The judge also referred a Trump lawyer in the case, Alejandro Brito, and senior Justice Department officials who signed off on the settlement to state bar authorities to determine if their actions violated legal ethics rules.