Vatican spokesman Father Federico Lombardi called the unauthorised and manipulative use of the popes picture in the photo montage totally unacceptable and suggested it might take legal action against the company.
This is a grave lack of respect for the pope, an offence against the sentiments of the faithful and a clear example of how advertising can violate elementary rules of respect for people in order to attract attention through provocation, he said in a statement.
A large banner with the image of the pope and the imam was hung from a bridge near the Vatican on Wednesday morning but later removed.
Benetton said the purpose of its campaign was exclusively to fight the culture of hate in every form but said it had nontheless decided to withdraw the image.
We are sorry that the use of an image of the pontiff and the imam should have offended the sensibilities of the faithful in this way, it said in a statement.
Other photo montages in the same campaign, in which Benetton says it supports the Unhate Foundation, show other world leaders kissing each other on the mouth.
US President Barack Obama is shown kissing Venezuelan President Hugo Chavez in one.
The Italian clothing company has run controversial advertising campaigns in the past, including one that showed grieving parents at the bedside of a man dying of AIDS.