Tony Blair suffered an embarrassing defeat on foundation hospitals today when delegates voted to scrap his flagship policy at Labour's annual conference.
The Prime Minister will push ahead with the controversial plan to give greater freedom to top hospitals.
But the defeat in Bournemouth will give fresh ammunition to Labour MPs fighting the reforms in the House of Commons.
A union motion calling for the policy to be scrapped was clearly carried on a show of hands.
And the leadership faced another rough ride over Iraq as delegates debated foreign policy this afternoon.
On a hospital visit this morning, Mr Blair predicted he would eventually win over critics of the health reforms.
"When you do these things you get some opposition at the beginning but usually that opposition falls away towards the end," he said.
Speaking before the vote, Health Secretary John Reid insisted that whatever the result the leadership had won the argument on foundations hospitals.
The hospitals are part of government's "biggest ever campaign against illness and pain" he told delegates in a well-received speech.
"That is what this Labour Party should be doing," he said.
"It's what this Labour Government should be doing. And it's what this Secretary of State for one is going to be doing."
However, despite a warm reception activists voted to scrap the policy in a defeat Labour left-wingers and unions will seize on in their campaign to have the policy dropped.
They claim foundation hospitals will poach staff from other parts of the NHS creating a two-tier health service.
Delegates backed a motion drafted by Unison, the largest public sector union, calling for the reforms to be scraped.
"The policy on foundation hospitals is contrary to the party's stated manifesto commitment in 1997 to end the internal market and 'put the NHS back together'," the motion said.
"It is a policy drawn from nowhere with no prior discussion in the party structures and no reference in the 2001 manifesto."
Former Health Secretary Frank Dobson has been a leading critic of the policy and the motion was seconded by his constituency party.
Mr Dobson said the Prime Minister should now live up to his promise to listen to the views of party members and drop the hospitals scheme.
Mr Blair himself attended the debate but made no contribution beyond nodding in agreement during Dr Reid's speech. He left the conference hall moments before the key vote.
Mr Dobson said: "I am convinced that the overwhelming majority of Labour Party members in the country are opposed to the idea of foundation hospitals, as are the overwhelming majority of people who work in the health service - the people we rely on, from doctors and nurses to porters and cleaners.
"I would hope the Prime Minister will start his listening campaign now, but I don't think he will."
Mr Dobson predicted that the Bill would be defeated in the House of Lords.
"The Lords will never pass the Bill as it stands, so amendments will have to be accepted," he said.