Revd Barry Trayhorn, an ordained Pentecostal minister, took his case to the courts claiming he was being discriminated against following officials reprimanding him after prisoners complained about the Bible verses he was reading.
He was working as a gardener at HMP Littlehey but led services in the prison chapel on a voluntary basis.
He says officials "bombarded" him with allegations of bad behaviour, despite claiming he simply spoke about God's love and forgiveness.
A tribunal has rejected his appeal claiming he was not discriminated against.
HMP Littlehey
The court heard how he'd read 1 Corinthians Chapter 6 Verses 9-11 during a talk about sin and forgiveness. Complaints followed by those who took offence to homosexuality being labelled a sin.
The ruling stated that Revd Trayhorn spoke of God's forgiveness in an "insensitive" way which "failed to have regard for the special nature of the congregation in the prison".
Speaking about the verdict, he said: "This case is alarming on a number of fronts. The Tribunal's reasoning was based on the effect that my message, which included the bible verses, had on those who heard them.
"Yet those who attend chapel do so voluntarily to worship God and to learn what the Bible has to say. The congregation know that the Bible will be preached on, and therefore complaints should have been considered in light of that.
"This decision has two very worrying consequences: Firstly, the Tribunal has effectively said that inmates will no longer be able to listen to sermons preached from the Bible which could change their behaviour for the better, as they become Christians and God transforms their lives.
"Secondly, this case is a warning shot to church leaders across the land that the ever growing political correctness will soon be hitting pulpits and if congregations do not like what they hear about sexuality, complaints will be made."
Revd Trayhorn was supported by the Christian Legal Centre and Christian Concern.
The campaign group claims this ruling could have consequences for church leader across the country.
CEO, Andrea Williams said: "This is a chilling judgment and one which should alarm MPs and Church leaders alike. What we are seeing, month by month, is a systematic marginalising of Christians in public life. It happens slowly, case by case, sector by sector but before long, no Christian, whether they be ordained like Mr Trayhorn or simply an office worker, will be able to openly state what their deep, sincere convictions are without fear of being reported to their employer and called a bigot.
"Last year the Prime Minister recorded an Easter message saying that we should be proud to be a Christian country, and how his Government had supported churches by giving money for the upkeep of cathedrals and the like. That is his rhetoric. The reality is that his Government's policies have done everything but support Christianity in this country. It is time for MPs and senior church leaders to wake up and see what is slowly developing in our nation and stand up for Biblical values."