The digitally manipulated image shows the Pope kissing Mohammed Ahmed al-Tayeb, grand sheikh of al-Azhar mosque in Cairo.
It is one of several publicity shots for Benetton showing world leaders kissing each other as part of the Italian clothing company's 'UNHATE' campaign.
The campaign seeks to challenge the "culture of hate" in the world, Benetton said.
Other unlikely pairings include US President Barack Obama and Chinese President Hu Jintao, and French President Nicolas Sarkozy with German Chancellor Angela Merkel. In another poster, Obama locks lips with Venezuelan President Hugo Chavez.
The advert featuring Pope Benedict was withdrawn after a brief appearance in Rome.
Vatican spokesman Federico Lomabardi said that the advert demonstrated a "grave lack of respect" for the Pope and Catholics.
"We must express the firmest protest for this absolutely unacceptable use of the image of the Holy Father, manipulated and exploited in a publicity campaign with commercial ends," he said.
"This shows a grave lack of respect for the pope, an offence to the feelings of believers, a clear demonstration of how publicity can violate the basic rules of respect for people by attracting attention with provocation," he said in a statement.
Benetton said in a statement: "We are sorry that the use of an image of the pontiff and the imam should have offended the sensibilities of the faithful in this way."