The Economic and Monetary Affairs Committee rejected UK moves to exempt the lucrative Eurobond industry from the tax, a decision described by City trade bodies as "deeply disappointing".
According to research commissioned by the Corporation of London, the extension of the withholding tax to Eurobonds could drive the entire industry out of the European Union, with the consequent loss of thousands of City jobs.
Commenting on yesterday's vote, John Langton, chief executive of the City trade body ISMA, said the exemption of Eurobonds was crucial for the preservation of the EU's international securities market.
He said: "I am disappointed at the result, but I cannot say I am surprised. It escapes me why politicians on the Continent are prepared to allow Europe's financial services industry to be damaged in this way."
The Commission's withholding tax proposals - which are intended to crack down on unfair tax competition within the EU - will now be considered by the full European parliament.
If, as expected, the parliament follows the recommendations of its Economic Affairs Committee and extends the tax to Eurobonds, the UK Government could use its veto to prevent the proposals becoming law.
A Treasury spokeswoman said: "We do not accept the current drafting of the Commission directive. We have said that we will not agree to action which would harm jobs and investment in Britain."
However, yesterday's vote did give the City some consolation. The Economic Affairs Committee has recommended the tax be set at 15 per cent rather than the 20 per cent initially proposed by the Commission.Reuse content