The £500,000 grant was awarded to help Mermaids create a network of groups across the country.
But following criticism of the charity, the Big Lottery Fund has announced that it has launched a review.
Criticism includes an article by the Sunday Times around the charity's stance on treatment for gender dysphoria, a condition where people are born into a body with the wrong gender.
The newspaper article alleges that parents are being pressured to support life-changing medical procedures for their children and doctors are being subjected to bullying.
TV writer Graham Linehan has also voiced concerns around the group and the grant and posted a thread on Mumsnet, that has since been deleted, urging people to write to Big Lottery Fund if they have concerns about the organisation and the funding award.
"We have received a range of correspondence in relation to a proposed grant to Mermaids, expressing both concern and support regarding this organisation," said a Big Lottery Fund statement.
"We're grateful to those who have taken the time to write to us, and in light of the nature and volume of the communication we have received, we have decided to undertake a review of this grant."
Mermaids has said it is disappointed that the grant is now under review but adds that it welcomes scrutiny of its work.
"Mermaids welcomes all levels of scrutiny into the charity and the services that we deliver to families and young people, and are determined to continue to support trans children to achieve a better future. We want to reassure all parents that access our support that we will continue to be there for you and your children," Mermaids said in a statement.
"We are very proud of the work that we do, and would like to thank our supporters, including our individual donors and funders who have made this enormously important work possible.
"Whilst we are disappointed that this is necessary, Mermaids understands that the volume of correspondence, both positive and negative, received by Big Lottery has necessitated a review of the grant that we were notified of last week."
Analysis: Court ruling identifies knowledge gap in gender identity practice
Skills for the job: Supporting children with gender dysphoria
The Mermaids statement continued: "It is unfortunate that transgender children and young people continue to be a largely misunderstood population, and we understand that misinformation about the reality for trans kids is at the heart of this.
"Perhaps this review will reveal more about the very real challenges faced daily by families and young people, and help to foster understanding and acceptance."
Among those to support Mermaids is Simon Blake, deputy chair of the charity Stonewall and chief executive of mental health organisation Mental Health First Aid England. He described the Sunday Times article as "a cheap pop".
So sad, but unsurprising to see The Sunday Times taking a cheap pop @Mermaids_Gender again. Any others remember the same headline in the Mail 20 years ago re The National Lottery funding gay youth groups? They stood strong then. I trust they will now #ComeOutForTransEquality
— Simon Blake (@Simonablake) December 16, 2018
Mermaids won the Charity Award at the Children and Young People Now Awards in 2016.
