The order loosens a provision of the tax code which prohibits religious organisations from directly supporting or opposing political candidates.
Mr Trump often complained about the rule as a candidate. Repealing it would require action in Congress.
LGBT groups and several human-rights groups oppose the order.
The order was signed by Mr Trump as he hosts conservative religious leaders at the White House for the National Day of Prayer.
"We will not allow people of faith to be targeted, bullied or silenced ever again," Mr Trump told the audience.
The White House says the order is necessary to protect religious groups that had been "persecuted by the Obama administration" such as the Little Sisters of the Poor, a group which faced huge fines over their refusal to pay for contraception under Obamacare.
In a full-page ad printed in Politico, more than 1,300 members of clergy argue that the order would turn religious freedom "into a weapon to discriminate against broad swaths of our nation, including LGBTQ people, women, and children in foster care".
Some religious groups, such as the Alliance Defending Freedom, said that the order did not go far enough in its protections for businesses "simply expressing a religious point of view on marriage that differed from that of the federal government".
What's in Trump's religious liberty order? - BBC News