US Edition One MP said it was "a tragedy" that the Catholic Children's Rescue Service would have to stop doing the work it has carried out since 1886, and accused ministers of discriminating against Roman Catholics.
Its directors say they have been forced to stop recruiting, assessing or approving couples who want to adopt children because of new legislation which means they cannot follow their religious beliefs by turning away homosexual couples.
Several other adoption agencies around the country have cut their ties with the Roman Catholic Church - which has ruled that gay adoption is morally wrong - in order to comply with the Equality Act.
But the CCRS, which is supported by the actor John Thomson and the parents of comedian Steve Coogan, said it could not do so because it is so closely linked to the Diocese of Salford, and will become the first Catholic adoption agency to stop offering the service.
It will now merge with local Catholic welfare groups to provide care homes for children, homeless shelters and support for parents of adopted children.
Kathy Batt, the agency's director, said: "The decision has been taken with regret by the trustees who have been fully informed all the way along.
"We did not want to separate from the diocese as other agencies have, though that is no criticism of them."
Jim Dobbin, a Catholic Labour MP in Manchester, said: "It is a tragedy. There is a shortage of people willing to adopt generally in the country and there is something very wrong when some of the better and more efficient agencies feel they have to close because they can't conform to what the Government is demanding.
"I don't think there was any need for this legislation at all. It was forced through and was all done to avoid discrimination but all it has done is to introduce discrimination against agencies that operate according to the principles of a religious faith.
"The Government will rue the day when it pursued this line of action. It smacks of a secular attack on the Catholic Church."
The announcement comes just days after a leading activist quit his position in Labour's youth section, accusing the party of "anti-Catholic prejudice" over its handling of sensitive debates on abortion and embryo research.
Under the terms of the Equality Act, which comes into effect on New Year's Day, discrimination in the provision of goods and services on the basis of sexual orientation is outlawed.
The law was forced through Parliament last year even though Tony Blair, the then Prime Minister who has now converted to Catholicism, wanted Catholic adoption agencies to be exempted from the rules.