The European Court of Human Rights has ruled against the use of crucifixes in classrooms in Italy.
It said the practice violated the right of parents to educate their children as they saw fit, and ran counter to the child's right to freedom of religion.
The case was brought by an Italian mother, Soile Lautsi, who wants to give her children a secular education.
The Vatican said it was shocked by the ruling, calling it "wrong and myopic" to exclude the crucifix from education.
The ruling has sparked anger in the largely Catholic country, with one politician calling the move "shameful".
The Strasbourg court found that: "The compulsory display of a symbol of a given confession in premises used by the public authorities... restricted the right of parents to educate their children in conformity with their convictions."
It also restricted the "right of children to believe or not to believe", the seven judges ruling on the case said in a statement quoted by AFP news agency.
Mrs Lautsi complained to the European court that her children had to attend a public school in northern Italy that had crucifixes in every room.
She was awarded 5,000 euros ($7,400; £4,500) in damages.
Vatican spokesman the Rev Federico Lombardi said the European court had no right intervening in such a profoundly Italian matter, the Associated Press reported.
"It seems as if the court wanted to ignore the role of Christianity in forming Europe's identity, which was and remains essential."
He told Italian TV: "The crucifix has always been a sign of God's love, unity and hospitality to all humanity.
"It is unpleasant that it is considered a sign of division, exclusion or a restriction of freedom."
Many politicians in Italy have reacted angrily.
Education Minister Mariastella Gelmini said the crucifix was a "symbol of our tradition", and not a mark of Catholicism.
One government minister called the ruling "shameful", while another said that Europe was forgetting its Christian heritage.
The government says it will appeal against the decision.
The BBC's Duncan Kennedy in Rome says that it is customary in Italy to see crucifixes in public buildings, including schools, despite the constitution saying that there should be a separation of church and state.
The law requiring crucifixes to be hung in schools dates back to the 1920s.
Although a revised accord between the Vatican and the Italian government ended Catholicism's position as the state religion in 1984, the crucifix law has never been repealed.
Some conservatives have already complained about schools dropping nativity plays to avoid upsetting Muslim children.