Although the Government won the Commons vote, the scale of the rebellion will encourage the House of Lords to reject the Welfare Reform Bill a second time. After the vote, peers threatened to scupper the Bill, which could be delayed for a year as the parliamentary session ends next week. Losing it would be a humiliating blow for Mr Blair. Although Downing Street insisted that no further concession would be made, the Government may have to climb down further to persuade the Lords to approve the Bill.
Rebel Labour MPs stood firm last night, despite intense arm-twisting by party whips and the offer of significant concessions over curbs on incapacity benefit for new claimants.
In a series of votes, Mr Blair's 170-plus majority was slashed to under 60 when the Commons voted to reject the changes to the Bill that were demanded by the Lords; 54 Labour MPs voted against the Government, and another 10 are thought to have abstained.
Lord Ashley of Stoke, the Labour peer leading the revolt in the Lords, said later that the rebel Labour MPs had won the moral argument, and he accused the Government of acting disgracefully. He said: "The Government's piffling concessions have made no visible impact on the House of Lords."
Today, Lord Ashley will re-table the amendments to the Bill that were rejected by the Commons, and he is confident that the Lords will approve them again on Monday.
David Willetts, the Tory spokesman on social security, said: "This vote is a moral victory for disabled people and a humiliation for the Government. My message to Tony Blair is to stop bullying and start listening."
Ministers insisted they were pleased with the outcome and said they were determined to secure the Bill's passage. They took comfort from the fact that fewer Labour MPs rebelled than in May, when 67 voted against the same measure in the biggest revolt since the general election. But the Government had hoped that its partial retreat would reduce the rebels' numbers to about 40.
Mr Blair's aides were working on the assumption that the Labour opposition to the Bill would convince Middle England that the Government was making tough choices on welfare reform. But one aide admitted: "We wanted a rebellion - but not one as big as this." Rebels who are usually loyal to the Government included Martin Caton, Tony Clarke, David Marshall and Tony Worthington.
Ministers warned that plans to create "stakeholder pensions", which form part of the Bill, would be delayed until after the next general election if the measure is scuppered. And there were hints that the Government might withdraw its plans to reprieve 75 hereditary peers, including 42 Tories, unless Tory peers backed down over the Welfare Reform Bill. But the Tories vowed to maintain their opposition.
In the Commons, Labour MPs insisted that the Government's concessions did not go far enough. Tom Clarke, who was Labour's spokesman on the disabled in Opposition, said disabled people were right to feel betrayed by the Government, because they would be taxed, he claimed, at a higher rate than millionaires.