The Obama administration has told schools to let transgender pupils use toilets matching their gender identity.
Attorney General Loretta Lynch said schools that don't comply may face lawsuits or lose federal aid if they do not comply.
One senior Republican politician has condemned the move as the "beginning of the end" of the current school system.
In a separate move, the president also strengthened protections for LGBT people receiving health care.
The federal government is fighting the state of North Carolina in court over a law requiring people to use toilets according to their gender at birth.
However the Obama administration education and justice departments say public schools must respect transgender pupils' gender identity even if their education records or identity documents indicate a different sex.
"There is no room in our schools for discrimination of any kind, including discrimination against transgender students on the basis of their sex," Ms Lynch said.
Campaigners hailed the move.
"This is a truly significant moment not only for transgender young people but for all young people, sending a message that every student deserves to be treated fairly and supported by their teachers and schools," said Chad Griffin from Human Rights Campaign, a gay, lesbian and transgender rights organisation.
But the directive, which has been sent to all public schools, was immediately rejected by senior Republican Party politicians meeting at a convention in Texas.
Texas Lieutenant Governor Dan Patrick said: "This will be the beginning of the end of the public school system as we know it."
"President Obama, in the dark of the night - without consulting Congress, without consulting educators, without consulting parents - decides to issue an executive order, forcing transgender policies on schools and on parents who clearly don't want it," he told 5NBC television.
A new gender identity comes into force as soon as a parent or guardian notifies the school that their child's identity "differs from previous representations or records" and must be respected even if it makes others uncomfortable, the directive says.
Ms Lynch said North Carolina's new state law had echoes of policies of racial segregation and efforts to deny gay couples the right to marry.
The federal government and the state are suing each other over the law, which the federal authorities say violates the Civil Rights Act.
However, many businesses and entertainers have criticised the measures as discriminatory.
Musicians have cancelled concerts in the states and several companies have pledged to curtail their business in North Carolina.
Last month a US appeals courts ruled that a Virginia school policy that barred a transgender pupil from using the boys' toilet was discriminatory.
Transgender health care
On Friday afternoon, President Obama and the Department of Health and Human Services (HHS) gave the LBGT community further protections when receiving health care.
A new rule in the Patient Protection and Affordable Care Act guarantees equal treatment for transgender people by insurance companies and health care providers.
It states people must be treated in line with their gender identity, including access to facilities such as toilets, and given the same treatments which are available to their chosen gender.
The rule applies to all federal funded health care and insurers.
The Health and Human Services Secretary Sylvia Burwell said the measure was a step towards "realizing equity within our health care system and reaffirms this Administration's commitment to giving every American access to the health care they deserve."
Transgender Americans can make civil rights claims if denied coverage or care based on their sex, which will be assessed by HHS's Office for Civil Rights (OCR).
HHS said the new rule was the first federal civil rights law that tackled sex discrimination in government-funded health care.