A cross-party alliance of peers defeated the Government by 237 to 194, a majority of 43, raising the prospect that it might lose the European Parliamentary Elections Bill.
Ministers are insisting on a "closed-list" system of proportional representation under which voters back parties rather than candidates, but the Lords have argued that concentrating power in the hands of the centralised party machine would be undemocratic.
The Government must now find a compromise before next Thursday's prorogation to persuade peers to end their "parliamentary ping-pong" before the session ends and the Bill is lost. It has already offered to review the system after next year's poll.
The Commons has twice reversed Lords rulings on the issue, despite strong reservations among some senior Labour backbenchers about party control over closed lists. Earlier this week, Jack Straw, the Home Secretary, accused Tory hereditary peers of opposing the "elected will" of the Commons, indicating that it would strengthen the Government's determination to scrap their voting rights.
Summing up after a heated debate, the Home Office Minister of State, Lord Williams of Mostyn, insisted that the Government would stand fast on the issue. "We shall use every means at our disposal to ensure that the clearly expressed will of the elected House is carried through and put into effect."
He said the House had discharged its duty as a revising chamber, not once, but twice, and should now back down. But the Tory spokesman Lord MacKay of Ardbrecknish said there was still time to ask the Government to think again and to find a compromise that would accommodate its critics.
Lord MacKay said the promise of a review did not satisfy the Lords' demand for the June poll to be held on an "open-list" system.
After the historic defeat, William Hague, the Tory leader, denied that hereditary peers were to blame for "wrecking the Bill". "If the Government fails, don't blame the House of Lords. It is time to stop an undemocratic decision that denies the voter a choice of candidate."
A former leader of the Lords, Lord Richard, warned peers that they were threatening the constitutional relationship with the Commons.
During the debate, the Labour peer Lord Shore of Stepney dismissed suggestions that this was a clash between the Commons and the Lords. "It is not democracy versus autocracy ... It is about open lists against closed lists."
Earl Russell, a Liberal Democrat peer, rejected Government claims that it would lose the Bill because of lack of the tight legislative schedule, saying there was still enough time for a compromise.Reuse content