It said priests should report abuse confided to them, even in the secret context of the confessional.
But the archbishop of Melbourne said any priest who broke the seal of confession would be excommunicated.
This means they would cease to be a member of the Church and would no longer be allowed a Catholic funeral.
The Most Rev Denis Hart said a law requiring this of priests would undermine a central tenet of Catholicism, the sacredness of the confessional.
“The seal of the confessional, or the relationship with God that’s carried through the priest and with the person, is inviolable,” he said.
In a statement, the Vatican said the report “deserved to be studied seriously”.
The five-year inquiry’s final report said institutions had “seriously failed” to protect children.
These institutions included the churches and the report found that 62% of abuse cases in religious institutions were in Catholic institutions.
Religious ministers and school teachers were the most commonly reported perpetrators, the report said.
The report also called on the Catholic Church to overhaul its celibacy rules
The royal commission, Australia’s highest form of public inquiry, heard more than 8,000 testimonies from victims of abuse, with accusations covering schools, churches and sports clubs over decades.
“It is not a case of a few rotten apples,” the report said. “Society’s major institutions have seriously failed… The problems have been so widespread, and the nature of the abuse so heinous, that it is difficult to comprehend.”
Since 2013, the royal commission has referred more than 2,500 allegations to authorities.
Prime Minister Malcolm Turnbull said “a national tragedy” had been exposed.
The report on Friday urged Australian Catholic bishops to petition the Vatican to amend canon law to allow priests to report sexual abuse disclosed to them during confession.
It also said the Catholic Church should consider making celibacy voluntary for priests because while it was “not a direct cause of child sexual abuse”, it had “contributed to the occurrence of child sexual abuse, especially when combined with other risk factors”. (Courtesy BBC)