I asked this question in grade school, high school, and college: Why didn't the Catholic Church move decisively to crush the Protestant Reformation while it was still small?
The overwhelming answer is that the Catholic Church didn't realize how serious it was.
1)It was regarded as a squabble among monks, and actually, that is correct. By posting his 95 theses, Luther meant to challenge others to debate--nothing more. He had no intention of leaving the Catholic Church, starting the Lutheran religión, or establishing Protestantism. No one, including Luther himself, realized what a powerful figure Luther was.
2) The wealthy leadership of the Church honestly did not realize how much the common people resented the wealth and corruption they saw. They were Catholic under the death penalty, and they didn't have any other choices anyway.
3) The Church did not realize how deeply Europe's nobility despised the Church's corruption. An uneasy equality had settled over Europe, with the wealthiest nations forced to give more money to the Church. Overall, the system was equal, and it worked. But local rulers in the crumbling Holy Roman Empire saw their chance to seize the vast wealth of the Church as its authority weakened.
4) Nobody yet realized the full effects of discovering America. Spain and Portugal had rapidly become Europe's wealthiest nations, but they were in a race to conquer the Indians; they quickly killed off the Reformation in their own countries, but used most of their new power against Indians, not Protestants.
5) Turkey was expanding into Africa, threatening Catholicism's southern flank. Resources were needed to deal with Moslems and couldn't be spared for the Protestants.
You need to remember that the Protestant Reformation was more than a religious event. It was also a political, financial, military, and social event, and many leaders were not Godly at all. Within a few years, the Catholic Church would find itself attacked on several fronts.