Father Neil Gallanagh abused boys while working as the chaplain of St John's School for the Deaf in West Yorkshire in the 1970s.
The Right Reverend Arthur Roche, the bishop of Leeds, sent letters to the Vatican asking for advice on what action should be taken against Gallanagh, after details of his offences emerged, but decided not to defrock him.
Victims' support groups said that the Catholic Church's failure to pursue the toughest possible course of action against Gallanagh seriously undermined its attempts to send a clear statement that priests guilty of abuse have been properly punished.
The disclosure comes as Pope Benedict finds himself embroiled in new revelations over child sex abuse, following the emergence of a letter signed by him as Cardinal Joseph Ratzinger in 1985, before he became Pope, resisting the defrocking of Stephen Kiesle, an American priest who had been convicted of offences against young boys.
The decision not to defrock Gallanagh is likely to prove embarrassing for the Catholic Church in England and Wales, which has, until now, escaped being dragged into the crisis that has engulfed the church in several countries over the past year.
The abuse first came to light in 2002, by which time Gallanagh was working as a parish priest in Horsforth, Leeds. In 2005, by then 75 and retired, he pleaded guilty to indecently assaulting two teenage pupils at the school. He was given a six-month suspended sentence and a further 11 charges involving boys as young as 11 were left on file.
However, he escaped being defrocked - or laicised - following Bishop Roche's decision that it would be sufficient to stop him from exercising his ministry.
The diocese did not refer the case to the Vatican until 2007, according to the bishop's spokesman John Grady, by which time Benedict XVI was Pope.
''When the Neil Gallanagh case was sent to Rome, the diocese did not ask for laicisation,'' Mr Grady said.
Margaret Kennedy, founder of Minister and Clergy Sexual Abuse Survivors, a support group, said that the church had not gone far enough in punishing Gallanagh.
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