The top of this article at Time.com recaps the controversy over Obama speaking at Notre Dame - this picks up with the Vatican's reaction to Obama thus far:

"This isn't the first time Obama has received decidedly mixed reviews from Catholics. A few months ago, he issued an Executive Order lifting restrictions on federal funding for stem-cell research. The move was immediately denounced by the USCCB as "morally wrong," and even moderate Catholics complained about the way the decision was handled. But the Vatican had a different reaction. L'Osservatore Romano, the official newspaper published under the authority of the Vatican's Secretariat of State, ran an article in late April essentially urging the bishops to chill out.

Under the headline "The 100 Days that Did Not Shake the World," the paper gave Obama a tentative thumbs-up for his policy changes concerning the economy and international relations. "On ethical questions, too — which from the time of the electoral campaign have been the subject of strong worries by the Catholic bishops — Obama does not seem to have confirmed the radical innovations that he had discussed," said the article, which noted that Obama's stem-cell guidelines were "less permissive" than expected.

So is this a schism? Have Cardinal George and the other conservative U.S. bishops gone rogue? Or is the Pope letting them play bad cop while he makes nice with the popular new American President?

The Vatican has a tradition of remaining largely above the fray while allowing — sometimes even encouraging — local bishops to be more aggressive in challenging political leaders. In Italy, for instance, both Pope John Paul II and Pope Benedict XVI have given communion to pro-choice politicians while letting Italian church leaders take the role of lecturing those Catholics on their dissent from church teaching. And this is particularly true of the Vatican's relationships with foreign leaders, whom the Pope views as fellow heads of state. Some observers have interpreted Cardinal George's Oval Office meeting with Obama on St. Patrick's Day to talk about abortion as an emissary visit, speculating that the cardinal was sent by Benedict.

But if the Vatican merely wanted to avoid public unpleasantness in its dealing with the U.S. President, it could do that by essentially ignoring the new Administration. Instead, it has displayed a surprising optimism, bordering on enthusiasm, for Obama's presidency. Breaking with protocol that usually prevents the Pope from addressing heads of state before they take office, Benedict sent a congratulatory telegram to Obama the day after the November election. The Pope noted the "historic" nature of the victory and said he would pray that God would "sustain you and the beloved American people in your efforts to build a world of peace, solidarity and justice." The two spoke directly less than a week later, and the Pope sent yet another telegram on Jan. 20 when Obama was inaugurated.

When reporters at Catholic News Service, the official news agency of the USCCB, talked to Vatican officials just prior to the Inauguration, they found the Holy See mostly focused on economic issues and Middle East politics. "Asked about pro-life issues, on which Obama and the Catholic Church have clear differences, Vatican officials took a wait-and-see attitude," the news agency reported.

The starkly different responses of some U.S. bishops and the Vatican could just be a matter of pure politics. As Obama's European tour last month showed, the Pope would hardly be the only head of state eager to start off on the right footing with the new Administration. In addition, Obama is broadly popular among American Catholics, 67% of whom gave him a positive approval rating in a recent Pew poll. At a time when the U.S. Catholic Church is losing members — a separate Pew study found that for every American who joins the Catholic Church, four others leave — Benedict may not be willing to test the costs of opposing Obama.

Of course, the Notre Dame kerfuffle has political roots as well. The protesters aren't accusing the university of violating church teaching but rather of violating a 2004 policy that the USCCB approved in the midst of vigorous debate over John Kerry's presidential candidacy. The statement, titled "Catholics in Political Life," was speedily drafted in response to questions about whether Kerry should be denied communion because of his pro-choice positions. Catholic institutions, it read, "should not honor those who act in defiance of our fundamental moral principles." When the bishops approved the statement, it wasn't clear whether it would carry much weight after the election, much less whether it applied to the case of a non-Catholic like Obama.

Among those most eager to drive a wedge between the President and rank-and-file Catholics are Catholic Republicans, who worry about losing more voters to the Democratic Party. Newt Gingrich wasn't yet a Catholic when the 2004 statement was debated and approved. But the new convert was the first to speak out against Notre Dame's commencement speaker. On March 24, the Republican former House Speaker weighed in on his Twitter account, which appears to have limits on capital letters: "It is sad to see notre dame invite president obama to give the commencement address since his policies are so anti catholic values." There's nothing like the zeal of a convert, but Gingrich may find it's awkward to try to be more Catholic than the Pope."

http://www.time.com/time/nation/article/0,8599,1898756,00.html