Vatican sources told Il Giornale that their support for abortion disqualified Ms Kennedy and other Roman Catholics President Barack Obama had been seeking to appoint.
Mr Obama was reportedly seeking to reward John F Kennedy's daughter, who publicly gave her support to his election bid. She had been poised to replace Hillary Clinton as New York senator, but dropped out amid criticism that she lacked enough experience for the job.
The Italian paper said that the Vatican strongly disapproved of Mr Obama's support for abortion and stem cell research. The impasse over the ambassadorial appointment threatens to cloud his meeting with the Pope during a G8 summit in Itay in July.
Ms Kennedy, 53, has said that she supports abortion. Raymond Flynn, a former US ambassador to the Vatican, said earlier this week that Ms Kennedy would be a poor choice.
"It's imperative, it's essential that the person who represents us to the Holy See be a person who has pro-life values. I hope the President doesn't make that mistake," he told the Boston Herald. "She said she was pro-choice. I don't assume she's going to change that, which is problematic."
The White House refused to comment.
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