The government has been defeated in the Commons over planned changes to Sunday trading rules.
MPs backed an amendment put forward by Tory MP David Burrowes opposing the reforms by 317 to 286.
A total of 27 Tory MPs voted against the government, more than enough to defeat the Conservatives' 12-seat majority.
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The plans – which fall under the responsibility of the Department for Business, Innovation and Skills – would have given local councils freedom to extend Sunday trading hours in shops across England and Wales.
The defeat came after a last-ditch attempt by George Osborne to stave off a Tory rebellion was blocked by Commons speaker John Bercow.
It marks the second time the government has been defeated in the Commons since May’s general election.
Introducing his amendment, Burrowes claimed councils were having the reforms “forced” upon them, resulting in an “inevitable domino effect and a race to the bottom”.
"The Government should not chip away unfairly and unreasonably and without due process," he said in his peroration.
He ended with a warning to ministers not to “misjudge the public mood” again on Sunday trading.
The government's plans would have seen local councils being able to extend Sunday hours for larger stores, which are currently limited to six hours' opening.
The changes were first brought forward in November but put back after the SNP said their 54 MPs would join Tory rebels and Labour to block the proposals.
In an attack on Osborne, Tory MP Stewart Jackson claimed the “dead hand of the Treasury” was involved in seeking to push through the changes.
Reports suggest up to 20 Conservative MP voted against the government.
"Luddites"
The Institute of Directors, a leading business lobby group, has condemned the “extremely disappointing” watering down of the government’s proposals.
Director General Simon Walker lamented that “luddites in Parliament” have managed to alter the plans that would have overhauled “arcane and outdated” Sunday trading rules.
“The forces of change cannot allow themselves to be defeated by the stuffed shirts on the green benches,” he said.
“When the planned pilots have been shown, as they will, to work well for businesses, staff and consumers alike, the government must revive their plans to relax the rules everywhere.”
He added: “In twenty years’ time, we will look back on this debate and wonder quite what the opponents were thinking.”
Lords defeat
Meanwhile, in the House of Lords, Labour, Liberal Democrat and crossbench peers defeated the government again, this time on two measures in the Immigration Bill.
The House of Lords opted to allow asylum seekers to work if their claims are not processed within six months.
It also voted to allow overseas domestic workers to switch employers without the risk of being immediately deported.