The elected House of Commons voted by 322 to 291 against the proposal as about 40 members of Blair's Labour party refused to support him, raising new questions about his authority. Financial markets reacted swiftly, the pound dropping a 1/4 cent against the dollar straight after the vote.
Blair had dramatically recalled his two top ministers - finance minister Gordon Brown and Foreign Secretary Jack Straw - from abroad in a bid to avoid defeat, but to no avail. He had earlier put his personal authority on the line, telling parliamentarians it was their "duty" to support the measure.
A general election in May slashed Blair's parliamentary majority to 66, meaning fewer than 40 Labour members can defeat him by voting with the combined ranks of the opposition.
Many say his decision not to fight another election has weakened his authority. The decision to recall Brown will reinforce the view that he is increasingly reliant on his likely successor to get things done. Police called for the new powers - increasing the detention limit from 14 days now - after Islamist suicide bombers killed 52 people in London on July 7.