The government has been defeated in the Lords in a vote on its plans for a £26,000-a-year household benefit cap.
Lib Dem, Labour and crossbench peers backed a bishop's amendment by 252 to 237 that child benefit should not be included in the cap.
Critics argued that imposing the same cap on all families, regardless of size, would penalise children.
The government said it was "very disappointed" and the vote "clearly flies in the face of public opinion".
Earlier the government defeated another amendment proposed by Labour to exempt people considered at risk of homelessness from the cap.
Continue reading the main story
Analysis
Gary O'Donoghue
Political correspondent, BBC News
If implemented in its current form, the government's benefit cap will save £290m next year, with 67,000 families losing on average £83 a week.
It's not a vast amount of money in the context of a welfare budget that runs to tens of billions of pounds, but its significance goes wider for the government.
First, ministers believe that they are in the same place as a significant portion of public opinion.
Second it reinforces the government's central policy aim of getting more people off benefits and into work by, they would say, encouraging a change in behaviour.
Thirdly it puts pressure on Labour, who know they can't oppose the cap outright, but have ended up having to criticise the implementation, a much less clear-cut position.
For the Lib Dems, this is difficult.
They believe their role is to soften Tory zeal when it comes to the benefits system.
Picking a fight, along with the bishops, also helps to create the fabled "definition" the party needs to secure its identity.
But if no real concessions are wrung, then they could end up looking impotent.
The annual cap would come into force for working age families in England, Scotland and Wales from 2013.
