According to the Colorado Name Change Project, the US State Department has stopped processing of all gender marker correction applications. This is confirmed by Notus.org, which adds that the policy change affects passport renewals as well.
At this time, there are rumors that the Minnesota Passport Agency is confiscating documents when denying a gender marker change. These rumors are unconfirmed as of the time of this post, but the situation is still developing.
https://www.namechangeproject.org/gender-marker/
https://m.facebook.com/ColoradoNameChangeProject/
https://www.notus.org/whitehouse/trump-gender-sex-order-passports
The ACLU has a form open for any affected by this policy:
https://www.aclu.org/transpassports2025
Update: Marco Rubio has confirmed that the state department has suspended all applications including a gender change or an X gender marker, including applications which were already in progress. Official word on the status of existing passports "will come via other channels."
https://theintercept.com/2025/01/23/marco-rubio-state-department-passports-gender-trans-nonbinary/
Update 2: tiktok user @gentlereality has confirmed that her passport application was suspended pending "administrative guidance" on Jan 30, and her original documents (birth certificate, etc) withheld "indefinitely". The application went through (with "M" gender markers) and the original documentation was returned Feb 3. From this I can conclude that the rumors of documentation being confiscated were at least partially true -- the difference between confiscation and withholding depends entirely on how long "indefinitely" actually lasts.