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LOUISVILLE, Kentucky (CNN) -- A federal discrimination lawsuit could impact President Bush's plan to fund faith-based social programs, as well as raise new church-state questions.

The lawsuit was brought by a woman who said she was fired by the Kentucky Baptist Homes for Children, a state-funded agency, because she is a lesbian.

VIDEO CNN's Brian Cabell reports on the court ruling from Louisville, Kentucky (Sept. 4) Play video (QuickTime, Real or Windows Media)

The judge rejected her argument that she was fired for religious reasons and said the church was within its rights. The judge did, however, question whether it was constitutional to give state money to religious organizations.

The issue is proceeding to trial without the woman. The trial is being seen as a test case for President Bush's "faith-based initiative," a plan to distribute federal money to religious organizations in an attempt to solve social ills.

Civil libertarians warn that church-state partnerships have proven troublesome in the past. For their part, church leaders are concerned that accepting federal money will bring new sets of regulations to abide by.

CNN National Correspondent Brian Cabell has the full story.