UPDATE 2-Court allows Democratic states to defend Obamacare payments

(Adds White House and New York Attorney General comment, background)

WASHINGTON, Aug 1 (Reuters) - A U.S. appeals court on Tuesday allowed Democratic state attorneys general to defend subsidy payments to insurance companies under the Obamacare healthcare law, a critical part of funding for the statute that President Donald Trump has threatened to cut off.

The U.S. Court of Appeals for the District of Columbia Circuit granted a motion filed by the 16 attorneys general, led by California's Xavier Becerra and New York's Eric Schneiderman.

President Donald Trump, frustrated that he and fellow Republicans in Congress have been unable to keep campaign promises to repeal and replace Obamacare, has threatened to stop making the so-called cost-sharing subsidy, or CSR, payments.

"The President is working with his staff and his cabinet to consider the issues raised by the CSR payments, a White House statement said.

The subsidies help cover out-of-pocket medical expenses for low-income Americans.

The case, which dates back to administration of President Barack Obama, was filed by the Republican-led House of Representatives against the federal government in an effort to block the subsidy payments to insurers for the individual plans created by the Affordable Care Act, popularly known as Obamacare.

The court's order allows Democrats who back the law to have a say in the legal fight, potentially giving them the power to block a settlement.

"The court's decision is good news for the hundreds of thousands of New York families that rely on these subsidies for their health care. It's disturbingly clear that President Trump and his administration are willing to treat them as political pawns," Schneiderman said in a statement.

The order issued by the three-judge panel, all Obama appointees, said the states had shown "a substantial risk that an injunction requiring termination of the payments at issue here ... would lead directly and imminently to an increase in insurance prices, which in turn will increase the number of uninsured individuals for whom the states will have to provide health care."

"In addition, state-funded hospitals will suffer financially when they are unable to recoup costs from uninsured, indigent patients for whom federal law requires them to provide medical care," the court order said.

Trump has repeatedly threatened to withhold the payments to insurers, which amount to about $7 billion this year, and referred to them as a "bailout."

The attorneys general cited in their May court filing Trump's own words vowing to let Obamacare "explode" as part of the reasoning for their intervention.

The case is currently on hold at the request of both sides. The expectation had been that the case would become moot because the Republican-controlled Congress was poised to repeal the Obamacare law. But that effort failed last week, meaning the court case has taken on renewed importance.

U.S. health insurer Anthem Inc is pulling back from 16 of 19 pricing regions in California where it offered Obamacare options this year in part due to uncertainty over the payments, state officials said on Tuesday. (Reporting by Lawrence Hurley; Additional reporting by Steve Holland; Editing by Peter Cooney and Cynthia Osterman)