Government plans to limit success fees charged by "no-win no-fee" lawyers in libel cases were put in serious doubt over becoming law before the general election after a Labour rebellion in a House of Commons committee.
Following the defeat, the measure must be reintroduced to the Commons, which the Ministry of Justice said it aimed to do after Parliament returns from its Easter break on Tuesday.
But with Prime Minister Gordon Brown expected to visit Buckingham Palace that day to seek the Queen's consent for the dissolution of Parliament for a 6 May general election, campaigners fear there will not be time to get the reform through.
Despite having a Labour majority of two on the First Delegated Legislation Committee, the Government lost a key vote on Justice Secretary Jack Straw's proposal to cut success fees from 100 per cent to 10 per cent.
Campaigners said they were "aghast" at what appeared to be a deliberate attempt by backbench Labour MPs to push the issue into the long grass.
Jo Glanville, editor of Index on Censorship, said: "It is of great concern that at the very last moment, there has been a concerted attempt by MPs to derail such an important reform to our chilling libel laws."
Peter Kilfoyle, one of four Labour MPs to vote against the measure, later said: "It seemed to me like a back-door assistance to those newspapers who want to make sure that they are beyond the reach of libel laws.
"I was also concerned about the lack of consultation. I certainly hope that there will now be a lot more consideration of the issues before this comes back again."
A Ministry of Justice spokesman said: "We are seeking to ensure this issue returns to the Commons next week."
At present, lawyers working on conditional fee arrangements (CFAs) can claim success fees of up to 100 per cent - doubling their normal fees - from the losing defendants in defamation and privacy cases.
Media organisations say the success fee, intended to enable lawyers who work on CFAs to use the money raised to finance any cases they lose, have made costs in defamation and privacy cases grossly disproportionate.
They also say it has had a chilling effect on freedom of expression, with editors either not running stories because of the risks of a highly expensive libel action, or settling cases they might be able to defend simply to avoid huge costs.
Straw's proposed reform is contained in a statutory instrument - a kind of legislation which can pass through Parliament without a vote in the chamber of either house, and is often nodded through by committee.
Today's setback comes after former Commons Speaker Lord Martin of Springburn last week delayed the progress of the Conditional Fee Agreements (Amendment) Order 2010 through the Lords by tabling a "motion of regret" forcing it to be debated on the floor of the House
Lord Martin's motion claimed there was not been "sufficient time for consultation with all of the professional and legal bodies concerned" and pointed to the "benefit of no-win, no-fee arrangements for those on modest and low incomes".
The 10 per cent limit was also opposed by some eminent jurists on the Lords benches, including former Lord Chief Justice Lord Woolf and Lord Scott of Foscote, a former Law Lord.
But it eventually cleared the Upper House without a vote after Lord Martin withdrew his motion, having been given assurances that further consultations would be carried out.
Junior justice minister Lord Bach told peers last week the change was intended to "protect the public interest" and was an interim measure while wider reform of the libel system was considered.
Jonathan Heawood, of literature and human rights charity English PEN, said: "It's hard to understand why anyone would stand in the way of these reforms on costs. Why should English libel law cost 140 times the European average?"
A Ministry of Justice source later said the department remained "hopeful" of getting the measure through Parliament before it is dissolved.
The order will now go to the Commons on Tuesday next week under a "motion of approval", which could be nodded through without a vote.
However, if any MP objects, it would then return to the chamber for a whipped vote the following day, when a further rebellion would be needed to stop it.
The MoJ source said it was still possible for the order to complete its passage, even if Westminster has entered the so-called "wash-up" period between the declaration of an election and the dissolution of Parliament, during which MPs attempt to tie up remaining legislative loose ends.
Labour backbencher Chris Mullin, who also voted against the order, said he was concerned that lawyers would refuse to take on cases from clients of modest means if they could only expect success fees of 10 per cent.
Mullin said: "The feeling was that the impact would be that lawyers wouldn't touch difficult cases any more.
"Nobody was suggesting that it should be 100 per cent. I think people want to see a happy medium".
Labour MP Tom Watson, a member of the Commons Culture, Media and Sport Committee which recently conducted an inquiry into the laws on libel, also voted against the order, which he said needed longer consultation with the legal profession.
He said: "I have consistently supported reforms of the libel system. The CMS Committee of which I am a member has put forward proposals.
"It is right we drive costs of cases down, but this proposal would deny access to many thousands of people. We need a new proposal that can work."