The present invention provides an ultra-stable rare earth type Y molecular sieve and the preparation method thereof, which method is carried out by subjecting a NaY molecular sieve as the raw material to a rare earth exchange and a dispersing pre-exchange, then to an ultra-stabilization calcination treatment. The molecular sieve comprises 1 to 20% by weight of rare earth oxide, not more than 1.2% by weight of sodium oxide, has a crystallinity of 51 to 69%, and a lattice parameter of 2.451 nm to 2.469 nm. In contrast to the prior art, in the molecular sieve prepared by this method, rare earth ions are located in sodalite cages, which is demonstrated by the fact that no rare earth ion is lost during the reverse exchange process. Moreover, the molecular sieve prepared by such a method has a molecular particle size D(v,0.5) of not more than 3.0 μm and a D(v,0.9) of not more than 20 μm. Cracking catalysts using the molecular sieve as an active component is characterized by a high heavy-oil-conversion capacity and a high yield of valuable target products.