A Catholic adoption agency has lost a two-year battle to be excluded from laws that ban discrimination against homosexuals.

Leeds-based Catholic Care wanted exemption from the 2007 Sexual Orientation Regulations, which require it to consider gay and lesbian couples as prospective parents.

But a ruling on Tuesday by the Charity Tribunal upheld an earlier decision from the Charity Commission. The bishop of Leeds, the Right Rev Arthur Roche, said he was disappointed with the tribunal's ruling. He said: "It is unfortunate that those who will suffer as a consequence of this ruling will be the most vulnerable children, for whom Catholic Care has provided an excellent service for many years.It is an important point of principle that the charity should be able to prepare potential adoptive parents according to the tenets of the Catholic faith."

Roche had told the Charity Tribunal the agency would suffer financially if it was forced to accept applications from homosexual couples because donations would dry up.

But the tribunal said it was "impossible" to conclude that Catholic Care's income would suffer it were to operate an open adoption service.

It said: "There was evidence before the tribunal that some Catholics do offer financial support to adoption agencies which provide services to same-sex adopters but no evidence from the charity that it had considered how it might attract alternative financial supporters if it did not discriminate."

It conceded there would be "a loss to society if the charity's skilled staff were no longer engaged in the task of preparing potential adopters to offer families to children awaiting an adoption placement", but said it had to balance the risk of closure of the charity's adoption service against the "detriment to same-sex couples and the detriment to society generally of permitting the discrimination proposed".

Gay rights group Stonewall welcomed the tribunal's decision, saying there should be "no question" of publicly funded services being allowed to "pick and choose their service users on the basis of individual prejudice".

The row over exemptions for faith-based adoption agencies dates back to 2007, when the regulations were introduced. At the time, the then Archbishop of Westminster, Cardinal Cormac Murphy O'Connor, warned that the 11 Catholic adoption agencies would close rather than place children with gay couples.

But the then prime minister, Tony Blair, said there was "no place" for discrimination in British society.

The Tory leader David Cameron called for a compromise solution because Catholic adoption agencies did a "fantastic job in placing hard-to-place children".

While some agencies have closed, others have severed their links with the church in order to stay open.