Ministers will have to vote down plans to implement Lord Justice Leveson's recommendations when they arrive in the Commons, after the coalition suffered its 63rd defeat in the Lords since 2010.
Last night peers voted by 272 to 141 to pass the 'Leveson amendment' to the defamation bill, which sought to satisfy the wishes of victims by implementing an arbitration service, a key plank of Leveson's proposals.
Cross-party talks had settled on the establishment of a royal charter as the best way to establish a body capable of overseeing self-regulation of the press, while being independent of interference from government.
But peers backed the establishment of "a fair, quick and inexpensive arbitration service for defamation", amid growing frustrations about the slow pace of behind-closed-doors negotiations.
It may be difficult for the coalition to muster a majority in the Commons to overturn the shift, despite initial confident indications from ministers they will seek to do so. The government had hoped to wave the changes through without a division after seeking cross-party unity.
Talks between the Press Complaints Commission and newspaper chiefs are taking place to establish a response to the amendment.
Lord Puttnam, the producer of Chariots Of Fire, who was responsible for the amendment, said he wanted to "break the logjam" which appears to be affecting talks between newspapers and the government. Cross-party talks will resume next week.
The vote came hours before the Independent revealed News International had hacked into the phones of Labour party workers.
It suggested cases had been settled with Labour staffers after they were targeted for their close contacts with ministers.
"I don’t know if it was dirty tricks or a fishing exercise for anyone in the Labour Party that had a bit of a personality," Amanda Ramsay, who worked for a government whip when Tony Blair was in No 10, told the newspaper.