Adoption agencies run by the Roman Catholic Church will have to consider gay couples as potential parents or close down, it has emerged.

After meeting with MPs and the Cabinet yesterday, Prime Minister Tony Blair has bowed to strong criticism from his own party over a suggested exemption from the Sexual Orientation Regulations for Catholic providers of adoption services.

It is reported that the agencies will be granted a transition period of around three years, so that they can deal with children already on their books.

Angela Eagle, MP for Wallasey, who is gay, said the compromise, which has Cabinet backing, is a sensible one.

She told The Guardian newspaper: “Transition is certainly possible so long as it does not go on forever.

“We are not demanding that gay couples absolutely in all circumstances have to be approved. We are saying they should not be ruled out.”

The decision is a defeat for the Roman Catholic hierarchy as well as for Mr Blair.

Since the proposed exemption was revealed at the weekend, Cabinet members and other MPs have lined up to demand that the new rules be applied without exceptions.

Yesterday it was revealed that if the opt-out was granted there would be resignations from the government.

The row over a Catholic exemption intensified as week went on, with an intervention from Anglican archbishops in support of their Roman colleagues on Tuesday.

Lib Dem MPs accused the head of the Catholic Church of attempting to blackmail the government and there were strident calls from gay Humanist organisations for Communities Secretary Ruth Kelly to resign or be sacked.

A devout Catholic, Ms Kelly has been the focus of much anger from rights activists.

She is seen as having pushed for the exemption from the Sexual Orientation Regulations for church adoption agencies, despite the fact that her department is responsible for equality.

The regulations are due to come into force in April. They protect gay, lesbian and bisexual people from discrimination when accessing goods and services.