John Thompson, 61, claimed he was helpless as the child pinned him down and forced her tongue into his mouth.
He said the little girl was flirtatious with him and was coming on to him before the assault.
Judge Gillian Matthews said he was 'a potentially high risk' to girls but that giving him a suspended sentence was the only way he could receive treatment.
The judge's decision at Teesside Crown Court has provoked outrage from children's charities. Peter Saunders, chief executive of the National Association of People Abused in Childhood, told The Sun newspaper: "It is outrageous that he got a non-custodial sentence.
"The man is clearly a danger to society, and particularly to children, and shame on the judge for passing what we consider is such a despicable sentence."
In an interview with police, Thompson had said: "I knew it was wrong, but somehow our mouths became open. I could not push her off."
The former brewery worker said after the case: "I regret it and can assure everyone that nothing like this will ever, ever happen again."
Police were called in January 2011 when the girl's gran found out about Thompson's inappropriate behaviour.
A probation report said Thompson groomed the girl but his barrister said the girl had instigated sexual contact.
Children's charity Kidscape said: "It is absolutely unacceptable for a 61-year-old man to claim that a seven-year-old girl made sexual advances to him that he could not prevent.
The responsibility must lie with the adult. However precocious the child, her vulnerability should have been evident.
"The adult male should have taken direct action to prevent the situation, and the relevant agencies should have been alerted."
Thompson's barrister Miss Pawson urged Judge Gillian Matthews not to jail Thompson because he would need a four-year sentence to get treatment behind bars.
She also said that locking up the grandfather, of Hartlepool, County Durham, would punish his disabled partner, for whom he is a full-time carer.
Thompson admitted a charge of sexual assault and was given an eight-month prison sentence, suspended for two years, with probation service supervision.
He was also put on the sex offenders' register, banned from having unsupervised contact with girls under 16 and ordered to attend a treatment programme.
Judge Matthews told him: "You are a man of good character and that is an important feature in the sentencing assessment, and also you have pleaded guilty."
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