Ambassador Bill Taylor testified before an impeachment inquiry that he was told Mr Trump wanted Ukraine to probe ex-Vice-President Joe Biden’s dealings, report agencies.
Mr Taylor said relations with Ukraine had been “fundamentally undermined”.
President Trump insists there has been no such deal, or exchange of favours, in Ukraine policy.
Responding to the latest testimony in Congress, White House press secretary Stephanie Grisham said in a statement: “President Trump has done nothing wrong - this is a co-ordinated smear campaign from far-left lawmakers and radical unelected bureaucrats waging war on the Constitution”.
One Democrat called Mr Taylor’s testimony “the most damning testimony I’ve heard”.
Mr Taylor, a career diplomat who has been the US envoy to Ukraine since June, is the latest witness to testify before lawmakers in the Democratic-led inquiry into suspected abuse of power by President Trump.
A transcript of a call Mr Trump made to Ukraine’s new President Volodymyr Zelensky on 25 July shows he urged him to investigate discredited corruption allegations against Mr Biden and his son, Hunter.
While Mr Biden had a key role in US policy towards Ukraine as vice-president, Hunter Biden joined the board of Ukrainian gas company Burisma.
The company had been investigated by former Ukrainian prosecutor general Viktor Shokin.
Mr Taylor told lawmakers that the president had made it clear that he wanted a publicly announced inquiry into the Bidens and alleged Ukrainian interference in the 2016 US election.
“Our relationship with Ukraine was being fundamentally undermined by an irregular, informal channel of US, policy-making and by the withholding of vital security assistance for domestic political reasons,” Mr Taylor said in opening remarks carried by US media.
The “informal” channel included US envoy to Ukraine Kurt Volker, Ambassador to the EU Gordon Sondland, Energy Secretary Rick Perry and Mr Trump’s personal lawyer, Rudy Giuliani.
By mid-July, Mr Taylor said, it was apparent the meeting Mr Zelensky wanted with Mr Trump “was conditioned on the investigation of Burisma and alleged Ukrainian interference in the 2016 US elections”.
“It was also clear that this condition was driven by the irregular policy channel I had come to understand was guided by Mr Giuliani.”
Mr Taylor also noted that he heard a White House budget and management staffer say she was ordered not to release aid to Ukraine and realised “one of the key pillars of our strong support for Ukraine was threatened”.
“I said on September 9 in a message to Ambassador Gordon Sondland that withholding security assistance in exchange for help with a domestic political campaign in the United States would be ‘crazy’,” Mr Taylor said. “I believed that then, and I still believe that.”
Mr Taylor’s remarks appear to contradict Mr Sondland’s earlier statement before lawmakers, where he said he had had “no discussions” with state department or White House officials regarding the investigating the Bidens.