Cardinal Cormac Murphy-O'Connor, president of the bishops' conference of England and Wales, said in a statement that today's decision is deeply disappointing.
Last week the cardinal pointed out in a letter sent to Prime Minister Tony Blair and members of the Cabinet that proposed sexual orientation regulations would require Catholic agencies to "act against the principles of Catholic teaching."
The Equality Act 2006, which will come into force in April after Parliament's approval next month, bans discrimination in the provision of goods, facilities and services on the basis of sexual orientation, and would require Catholic agencies to consider homosexual couples as potential adoptive parents.
Instead of an exemption, which was supported by the bishops of Scotland, the Anglican Church and the Muslim Council of Britain, the prime minister said the Church would have a 21-month grace period to implement the law.
Cardinal Murphy-O'Connor said today, "This debate has raised crucial issues for the common good of our society. We believe there is an urgent task to reach a new consensus on how best the public role of religious organizations can be safeguarded and their rights upheld.
"We are, of course, deeply disappointed that no exemption will be granted to our agencies on the grounds of widely held religious conviction and conscience.
"We look to the forthcoming parliamentary debate to address some of the fundamental issues centered on the well-being of the child, whose needs must always be put first."
The cardinal added: "We note and welcome, however, the government's expressed desire that the experience and excellent work of our agencies is not lost, especially for the benefit of needy children.
"We appreciate the two year period that will be established for independent assessment.
"We note that one of its purposes will be to 'ensure the valuable expertise of faith-based adoption agencies in successfully placing the most vulnerable children, including the full range of post-adoption services, is retained and developed'.… We understand that local authorities will continue to work with and fund our Catholic agencies in their vital and sensitive work during this period."
Cardinal Murphy-O'Connor reiterated the bishops' desire to work with the government: "An important part of our Catholic tradition is to work constructively with the government in mutually respectful cooperation, in which we can act with confidence and integrity in the service of the common good."