In a historic constitutional clash, peers voted by 212 to 183, majority 29, for an "open list" system, which would allow the electorate to vote for named candidates in next June's poll.
With the Government's preferred option, to be reintroduced under the Parliament Act in the next session of Parliament, electors can vote only for the party of their choice and not for individual candidates.
Opening the debate, Lord MacKay of Ardbrecknish said that the Government's approach showed how a party could "deny choice to the people and even deny choice to the party members.
"The whole way the Labour Party behaves about selection actually brings the closed list into suspicion and disrepute. It's their obsession with control that will so damage the electoral system if we proceed with the way proposed," he added.
But Tory former minister Lord Garel-Jones warned peers that they were giving ammunition to those who wanted to scrap hereditaries: "... if the Government is defeated again tonight, it will be a defeat for this House. I believe it will be a defeat for my party."
Crossbench peers' convener and former Commons Speaker Lord Weatherill added: "I can see a trap that has been put before us."
The Liberal Democrat frontbencher Earl Russell, who previously voted against the Government, called on peers to back the decision of the Commons. "If we think that killing the Bill is a bridge too far, it usually, but not quite always, is."
Lord Stoddart of Swindon, a former Labour MP, accused the political parties, in selecting their Euro-candidates before the Bill was law, of "taking this House for granted. I believe that is what has been done and the Government may now regret it ... the electorate ... don't like closed lists and if the Lords throws them out tonight, the people will be on their side."
But Tory Euro-candidate and former MEP Lord Bethell announced he would be defying the Whip to vote with the Government. "I have come to the conclusion that we are in danger this evening, if we do what Lord MacKay has advised, of doing what the English cricket team do so often and that is grabbing defeat from the jaws of victory."
Lord McNally, for the Liberal Democrats, added: "What is clear is that the Conservative 'High Command' see in this ... legislation the confluence of three deep prejudices: Euroscepticism, hostility to PR and hostility to reform of this House." Urging ministers to stand firm, he said: "Blink now and you will embolden those who oppose constitutional reform across the board. Stop them here and you will save yourselves a lot of blood, sweat and tears."
Summing up, Lord Williams of Mostyn, the Home Office minister, warned peers that the legislation would be lost if they voted against the Government again. He said: "This is the end of the road. Prorogation is upon us."
Earlier, Tony Blair attacked the Tories during Question Time for relying on the votes of hereditary peers to overturn the will of elected MPs, saying: "That is not democracy".
Blaming the in-built majority of Conservatives in the Lords for the defeat, the Prime Minister told the Tory leader, William Hague: "You have never dealt with the essential point ... is the will of the House of Commons the will that should be upheld, or is it the will of the Tory hereditary peers?
"Perhaps you could get up and admit that it is only with Tory hereditary peers you come anywhere near winning this vote. That is the real issue, Conservative support of hereditary peers or our support for an elected House of Commons!"
n Tory peers are planning to ambush the Government's Bill to reform the House of Lords by tabling a key amendment to put off the abolition of hereditary peers' voting rights until after a Royal Commission has delivered its report.
The move would wreck the Government's plan to abolish the right of hereditary peers to speak and vote in the Lords before the next general election.Reuse content