The British government says a Catholic adoption agency must change its policy on gay couples or stop offering adoption services.
Catholic Care, a charity in Leeds, northern England, had argued that as a religious group it should be allowed to offer its adoption-support services to heterosexuals only.
However, Britain's charity commission has ruled that practice was discriminatory and breached European human rights laws. It ordered the charity to either cease its work to place children with adoptive parents or to abide by equality laws - meaning it would need to consider gay couples as prospective parents.
"The charity is very disappointed with the outcome. Catholic Care will now consider whether there is any other way in which the charity can continue to support families seeking to adopt children in need," the group said in a statement.
Other British Catholic agencies have either withdrawn from placing children or cut their ties with the church since 2007, when the government imposed the anti-discrimination rules.
"The law is carefully weighted to balance the rights of organizations such as religious charities and the rights of minority groups such as those with a particular sexual orientation," Britain's Equality and Human Rights Commission said in a statement. "We believe the outcome in this case helps reinforce that balance."