The Catholic Church is facing further controversy over reports that it has spent €23m (£20m) for a share of an apartment block in Rome that also houses Europe's biggest gay sauna.

As cardinals gathered for the conclave to select a new pope, the Vatican faced fresh embarrassment after it emerged that it had paid for up to 20 apartments for priests in the building in 2008. It is believed Cardinal Tarcisio Bertone, Pope Benedict's former right-hand man, was behind the purchase.

The huge stone building also contains the Europa Multiclub Sauna and Gym, which claims on its website to be "the number one gay sauna in Italy".

Cardinal Ivan Dias, the head of the Congregation for Evangelisation of Peoples, stays in a 12-room apartment on the first floor of the building, just above the entrance to the sauna.

The 76-year-old former archbishop of Bombay has gone on record as saying how he believed that gay and lesbian people could be "cured" of their "unnatural tendencies" through the sacrament of penance.

Italian newspaper La Repubblica, which ran a front page story on the revelations about the senior clerics' neighbours in the apartment block, said that the presence of Italy's best known gay sauna was "an embarrassment" for the Church.

The Italian media also highlighted how the Holy See would avoid payments to the Italian state over the purchase of the block because of tax breaks by Berlusconi's government that followed the building being recognised as part of the Holy See.

The irony of the location of the Vatican apartments has not been lost on the sauna or its visitors. On its website, it promotes one of its "bear nights" with a video of a man stripping off before changing into a priest outfit. The voiceover adds that the man, "Bruno", is "free to the music of his clergyman, remaining in a thong, because he wants to expose body and soul".

Readers on Italian gay websites were also quick to express their amusement. One wrote: "Oops, I took the wrong door, I thought it was the chapel. If you can't go to the gay sauna for fear of being seen what do you do if you have millions of euros stolen from Italians? You buy the apartment block with the sauna inside."

Last month, the Vatican was met with further controversy as Britain's most senior Roman Catholic cardinal, Keith O'Brien, resigned after admitting "inappropriate behaviour" towards priests.