Dr John Sentamu accused ministers and councils of being "intolerant" of faith groups and faith schools, who he said are inspired by their beliefs to provide vital work for their communities.
His comments come after a landmark independent report found that the Government had no interest or understanding in the contribution made to society by the Church of England.
In a speech at Westminster Central Hall organised by the Youth for Christ organisation, Dr Sentamu said: "We must resist any trend in national or local Government where the decision as to whether a solution works is not based on results, but upon the intolerance that sees a project motivated by faith as being tainted and unsuitable for receipt of funding.
"Rather there should be a recognition of the valuable work being carried out by groups motivated to serve the common good by a belief in dignity of all as God's creatures in which his divine spark resides."
It came as one of the most powerful conservatives in the Anglican Communion warned that England has abandoned God, creating a vacuum that is being filled by Islam.
The Most Rev Peter Akinola, Primate of Nigeria, said: "We see England as a Christian nation, but somehow, for political reasons, for economic reasons, you let Christ go. You [have created] a huge religious vacuum in this country, in the name of multiculturalism - and now it is being filled by Islam." Read more
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