Ernest Fenwick MacIntosh, 71, arrived in the Himalayan nation on a tourist visa last August and approached the Jesuit-run St Xavier's Social Service Center for homeless children with an offer of donations.
A court statement released after his conviction said MacIntosh repeatedly molested the boy, who has only one arm and was living in the orphanage, after offering him gifts and money and promising to pay for a prosthetic arm.
"He has been proven guilty and sentenced to seven years in jail... The boy's testimony and results of a polygraph test provided strong evidence against him," court spokesman Kaushaleshwor Gyawali told AFP.
MacIntosh has also been ordered to pay USD 10,000 in compensation to the victim.
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The case underscores problems facing Nepal's orphanages, some of which have been hit by allegations of sexual abuse, corruption and fraud in recent years.
Although it is illegal to volunteer in Nepal on a tourist visa, orphanage officials often allow foreigners to spend time with children in exchange for donations. Background checks are rarely conducted on those offering to help.
In August 2012, Briton Simon Jasper McCarty pleaded guilty to sexually abusing three boys whom he met in Nepal. In December 2010, French charity worker Jean-Jacques Haye was convicted of raping 10 children in a Kathmandu orphanage.