The Catholic Church (at least) will never embrace homosexuality as a lifestyle. After all, Scriptures say it's a sin to "lay with men as with women." They do admit that it's not a sin simply being homosexual, and they don't have a problem with gays themselves (as long as they're celibate). I can't presume to speak for Jesus, but I would think that He would love homosexuals like all other "sinners" he's loved throughout the New Testament -- He would just never condone the sins themselves and would encourage them to "repent" from them. So, regardless of my views (people should be able to do whatever or whomever they want as long as it's between consensual adults), the Catholic Church will never be that progressive.

In any event, Kly is right, most of us are NOT in a state of grace when we receive Communion either -- and that's a sin in itself. The Priest was correct, but could have handled it differently. He could have heard her confession before the ceremony (tho with her "living in sin" he may have ruled that out), or simply explained the situation beforehand. (BTW, how did he even know that she was living with another woman??)