The leader of the Roman Catholic Church in England and Wales has said adoption agencies will close if they cannot opt out of new gay rights laws.
Cardinal Murphy-O'Connor said he feared discrimination
Cardinal Cormac Murphy-O'Connor has written to Cabinet ministers saying church teaching prevented its agencies placing children with homosexuals.
Forcing people to act against their consciences would mean discrimination on the grounds of belief, he added.
No 10 said Tony Blair had not decided whether to exempt Catholic agencies.
His official spokesman: "This is not a straightforward black and white issue.
"The cardinal's letter illustrates the sensitivities on one side but there are also sensitivities on the other side. We need to plot a way through that recognises the interests of children but also gets us through."
Communities Secretary Ruth Kelly, a devout Catholic, was reported at the weekend to be considering an opt-out which would cover Catholic adoption agencies.
The Equality Act, due to come into effect in England, Wales and Scotland in April, outlaws discrimination in the provision of goods, facilities and services on the basis of sexual orientation.
It works in a similar way to rules on sex and race discrimination.
However, Cardinal Murphy-O'Connor said Roman Catholic teaching about the foundations of family life ruled out the choice of homosexual adoptive parents.
He said the closure of seven agencies would represent a wholly avoidable "tragedy".
In his letter, Cardinal Murphy-O'Connor said: "We believe it would be unreasonable, unnecessary and unjust discrimination against Catholics for the government to insist that if they wish to continue to work with local authorities, Catholic adoption agencies must act against the teaching of the Church and their own consciences."
The Catholic Church's agencies are said to handle 4%, or about 200, of all adoptions a year. However they handle about a third of those children judged difficult to place.
The Independent on Sunday reported that Ms Kelly was battling to allow Catholic adoption agencies to turn away same-sex couples.
It reported that she had the backing of Mr Blair, whose wife is Catholic and whose children went to a Catholic school, but faced opposition from other senior colleagues.
Her department responded that "no decisions" had been taken on the detailed rules.
Ruth Kelly was reportedly considering an opt out for Catholic agencies
The Act was supposed to come into force last October, but was delayed because of 3,000 responses to a consultation.
Ms Kelly said her own religion would not prevent her from tackling discrimination, including that against homosexuals.
A number of ministers spoke out against an opt-out following the weekend reports.
Lord Chancellor Lord Falconer told BBC Radio 4's Today programme adoption agencies had to make their own judgements, based on the child's best interests.
But he added: "If we take the view as a society that we should not discriminate against people who are homosexual, you cannot give exclusions for people on the grounds that their religion or their race says we don't agree with that."
Labour MP Angela Eagle told BBC Radio 4's The World at One the situation the cardinal was placing the government in was close to "blackmail".
Liberal Democrat MP Evan Harris suggested religious organisations carrying out public welfare functions should be gradually replaced with "secular-governed" agencies.
"Welfare for the vulnerable cannot be put at risk by reliance on organisations who threaten to pull out, rather than apply the law," he said.
But Peter Smith, the Catholic Archbishop of Cardiff, said it cost agencies about £20,000 to select and train each family to adopt.
The government then repaid the money if a local authority agreed to a couple's suitability.
Archbishop Smith said: "The regulations as they stand would deprive our societies of funds, and they would close."
A recent attempt in the House of Lords to overturn the law, which has already been brought into force in Northern Ireland, failed by 199 votes to 68.