The leader of Ireland's Catholics has criticised the republic's government for closing its embassy to Vatican City.

Cardinal Sean Brady expressed his "profound disappointment" over the move, which comes after diplomatic clashes this year between the Fine Gael-Labour coalition and the Holy See over the Vatican's handling of the clerical child sex abuse scandals in Ireland.

"This decision seems to show little regard for the important role played by the Holy See in international relations and of the historic ties between the Irish people and the Holy See over many centuries," the cardinal said on Friday.

The Irish foreign minister and deputy prime minister, Eamon Gilmore, said the decision followed a review of overseas missions which gave "particular attention to the economic return from bilateral missions".

Gilmore said the government had also decided to close Ireland's embassies to Iran as well as its representative office in Timor-Leste He said the coalition was obliged to implement cuts to meet targets set out in the EU/IMF rescue programme for the Irish economy.

The foreign minister pointed out that the closure of the three embassies would save about €1.25m (£1.1m) a year. He said that while the embassy to the Holy See was one of Ireland's oldest missions, it yielded no economic return, and that Ireland's interests could be sufficiently represented by a non-resident ambassador. The administration will be seeking the agreement of the Holy See to the appointment of a senior diplomat to this position, he added.

Gilmore stressed that the closure of the embassy in the Holy See was not related to the recalling of the Papal Nuncio from Ireland this year. He added that the government would not be selling Villa Spada, the Irish embassy in the Vatican. Instead, staff working in the embassy to Italy in Rome, which is a rented premises, will be transferred to Villa Spada.

The Vatican also said every state was "free to decide, on the basis of its possibilities and its interests, whether to have an ambassador to the Holy See resident in Rome or in another country. What is important is diplomatic relations between the Holy See and states, and these are not in question with regard to Ireland."

The prestigious Villa Spada is the most valuable property owned by the diplomatic service. The Vatican was among the first states with which the newly independent Irish Free State established full diplomatic relations in the 1920s.