US President Donald Trump's embattled charitable foundation will be dissolved under court supervision amid a legal battle in which a New York state lawsuit alleges he misused funds to advance his presidential campaign and benefit his business.

Key points: Ms Underwood is seeking millions of dollars in penalties

Ms Underwood is seeking millions of dollars in penalties She has accused Mr Trump and his children of improper self-dealing and misuse of assets

She has accused Mr Trump and his children of improper self-dealing and misuse of assets Last month, New York Supreme Court rejected Mr Trump's motion to dismiss the lawsuit

The lawsuit against the Donald J Trump Foundation seeks to recoup $2.8 million and ban Mr Trump and his three eldest children — Donald Jr, Ivanka and Eric — from leadership roles in any other New York charity.

The charity reached a legal agreement to dissolve, but the lawsuit will continue.

New York Attorney-General Barbara Underwood, a Democrat, said the foundation's assets would be distributed to charities vetted by her office. The deal is subject to approval by a New York state judge.

In a statement, Ms Underwood said the foundation had served as "little more than a chequebook to serve Mr Trump's business and political interests", and called the agreement "an important victory for the rule of law".

Barbara Underwood, pictured in 2015, has accused President Donald Trump's charitable foundation of being an extension of his business and political interests. ( AP: Hans Pennick, file )

Lawyers for the foundation said any infractions were minor.

Alan Futerfas, a lawyer for the Trumps, said in a statement that the lawsuit had delayed the foundation's plan to dissolve after Mr Trump won the US presidential election in November 2016.

He added that over the past decade, the foundation had distributed about $26 million, including $11 million of Mr Trump's personal money, to more than 700 charitable organisations.

Mr Trump, a Republican, has previously said on Twitter that Ms Underwood's lawsuit was a concoction by "sleazy New York Democrats".

In their motion to dismiss the case, the Trumps said it reflected Ms Underwood's "pervasive bias" against them.

Mr Trump has previously blamed the lawsuit on "sleazy New York Democrats". ( Reuters: Mike Segar )

The ruling came less than a month after Justice Saliann Scarpulla of the New York State Supreme Court in Manhattan rejected Mr Trump's motion to dismiss the lawsuit.

The motion had argued that the US Constitution immunised Mr Trump from Ms Underwood's claims alleging breach of fiduciary duty, improper self-dealing, and misuse of assets belonging to the foundation.

Ms Underwood sued Mr Trump and his adult children Donald Jr, Eric and Ivanka on June 14, after a 21-month probe that she said uncovered "extensive unlawful political coordination" between the foundation and Mr Trump's campaign.

The lawsuit remains pending.

Reuters/AP