The Church of England's reputation could be "damaged for a generation" if a legal bid to evict protesters from the steps of St Paul's Cathedral ends violently, a former close adviser to the Archbishop of Canterbury has warned.

The advice came as a senior figure within St Paul's quit over its handling of the anti-capitalist protests, turning what was a PR disaster into a crisis for the institution. Giles Fraser, the charismatic Canon Chancellor of St Paul's Cathedral, said he resigned because of fears an eviction would lead to "violence in the name of the Church".

Dr Fraser, a media-savvy commentator who regularly writes for newspapers and appears on Radio 4's Thought For The Day, told The Independent last night: "The red line for me is that I am not able to sanction the use of force in the name of the Church to move the protesters on. There are other people who have different priorities and I respect those."

He added: "I believe passionately in the right of people to protest peacefully. I asked the police to move aside so that people could come to worship." He added: "I am in some sense sympathetic with people who feel angry at the way money is distributed in our society."

The resignation followed refusals by the Dean of St Paul's and the Bishop of London to rule out forcibly evicting the Occupy London Stock Exchange demonstrators camped in the cathedral's courtyard in the heart of London's financial district. Today, as the cathedral reopens a week after it was shut for the first time since the Blitz, the Corporation of London and the Church – both of which own parts of the land the 200 tents are using – will consider a legal challenge to evict them.

While the Church maintains it is still "considering all options", the thought of a forced eviction has horrified many within the institution. George Pitcher, an Anglican priest and until earlier this year the Archbishop of Canterbury's media adviser, said: "The Cathedral appears to be embarking on a strategy that will end with the eventual forced – and quite possibly violent – eviction of protesters which would damage the reputation of the Church of England for an entire generation. It's bad enough to lose Giles Fraser... but somehow the Church has also managed to grab a PR disaster from the jaws of something which could have been really quite successful."

Reverend Peter Ould, an Anglican priest who has regularly visited the camp, added: "Giles basically didn't agree to toe the party line and that's what happens when you employ a one-man band. But this whole affair has revealed how disastrous the Church's approach towards PR is. The protests were the biggest PR opportunity St Paul's has had since Diana and Charles got married there 30 years ago. This one has unravelled a lot faster."

The leader of the Church, Dr Rowan Williams, the Archbishop of Canterbury, was in Italy yesterday meeting the Pope and has been informed of the developments. There have been calls for him to make a statement on the issue, but one Church insider said he would be "reluctant" to intervene as it would mean undermining the Bishop of London and the Dean of St Paul's.

The ongoing furore comes at a time when mainstream Anglicanism in Britain is struggling to attract new worshippers amid a seemingly irreversible decline in regular church attendance over the past five decades.