Sydney Archbishop George Pell is accused of molesting a 12-year-old boy when he was a seminarian in the Archdiocese of Melbourne.
"The alleged events never happened. I repeat emphatically, that the allegations are false," Pell said in a statement. "To allege that I am ... personally implicated in this evil is a smear of the most vindictive kind."
Pell also says he is confident that his name will be cleared.
"For the good of the Church and to preserve the dignity of the office of Archbishop, I will take leave from today as Archbishop of Sydney until the inquiry is completed," Pell said. "I will, of course, cooperate with this independent inquiry in every way possible - frankly, openly, and unreservedly."
The Catholic Church has appointed retired Supreme Court judge Alec Southwell to investigate the allegations against Pell.
A statement from the church's National Committee for Professional Standards, established to deal with sex abuse allegations, said the case had not been reported to the police.
"The complainant was advised and encouraged to report the matter to the police but at this stage has declined to do so," the statement said.
Pell came under fire earlier this year after he admitted on a current affairs program that he offered a family thousands of dollars in exchange for a promise not to sue over claims that their two daughters were sexually abused by a priest for six years.
He later denied that the money was intended to buy the family's silence, and rejected calls from child-abuse victim advocates for his resignation.
In July, Pell again made headlines when he reportedly told delegates to the World Youth Day forum in Canada that child sex abuse by priests was less of a crime than abortion.
The Catholic Church in Australia, like its counterpart in the United States, has been under fire in recent years over sexual abuse by its clergy.
Pell said in June that up to 90 priests and brothers had been convicted of sexual abuse in the past six years in Australia.
Reports of sexual abuse by clergy in Australia have been emerging for more than a decade.
The Catholic Church, Australia's biggest, formally apologized to victims of sexual abuse in April 1996. The church has paid out millions of dollars in compensation to sexual abuse victims.
All of Australia's major churches have admitted that their clergy have sexually abused children.