Fr Paul Kalchik has been forced to step down for the time being from Resurrection Catholic Church in the Avondale neighbourhood of Chicago, following the incident on 14th September.
In a letter to parishioners, Archbishop of Chicago Cardinal Blase Cupich said: "It has become clear to me that Fr Kalchik must take time away from the parish to receive pastoral support so his needs can be assessed."
According to local newspaper the Chicago Sun Times, Fr Kalchik has claimed he suffered abuse at the hands of a priest as a young man and considered church sex abuse as a "gay thing".
Fr Kalchik torched the banner, which he found kept in storage at Resurrection Church, during a private service - despite a warning from Cardinal Cupich against such a move.
The 56 year old had advertised the event in a church news bulletin two weeks beforehand.
The Chicago Sun Times reported sources who claimed Kalchik and his family had received death threats since he burned the flag.
Meanwhile, a protest staged outside Resurrection Church last Wednesday was led by Democrat politician and Chicago City Council member Deb Mell.
Responding on Twitter to Fr Kalchik's removal, she wrote on Twitter: "Thank you to Cardinal Cupich for taking swift action and listening to the concerns of our community tonight by removing Fr. Paul."
In his letter, Cardinal Cupich also said: "I do not take this step lightly.
"Rather, I act out of concern for Fr Kalchik's welfare and that of the people of Resurrection Parish.
"I have a responsibility to be supportive of our priests when they have difficulties, but I also have a duty to ensure that those who serve our faithful are fully able to minister to them in the way the Church expects."
Stay up to date with the latest news stories from a Christian perspective. Sign up to our daily newsletter and receive more stories like this straight to your inbox every morning.