Does the Catholic Church believe in hell and if so, why is God so cruel?
It is the catholic view that God does not create any mechanism that causes pain in the afterlife. Rather, the pain/discomfort is an experience as a result of a choice. It is not necessary to say that God imposes hell as punishment. It is not clear that God makes it intentionally unpleasant. It may be the very nature of the people who are there, and the fact that they are finally given what they want: freedom from God.
To the Catholic, heaven and hell may be the very same objective place (if one wishes to call it a place as an anthrophormism). How you experience this place is wholly dependant on what choices you make in this life. From:
CATECHISM OF THE CATHOLIC CHURCH
1033 We cannot be united with God unless we freely choose to love him. But we cannot love God if we sin gravely against him, against our neighbor or against ourselves: "He who does not love remains in death. Anyone who hates his brother is a murderer, and you know that no murderer has eternal life abiding in him."612 Our Lord warns us that we shall be separated from him if we fail to meet the serious needs of the poor and the little ones who are his brethren.613 To die in mortal sin without repenting and accepting God's merciful love means remaining separated from him for ever by our own free choice. This state of definitive self-exclusion from communion with God and the blessed is called "hell."