David Cameron and Nick Clegg were forced into a humiliating last-minute retreat last night to head off a defeat over plans for an elected House of Lords. The Prime Minister and his deputy blinked first in a stand-off with more than 100 rebel Conservative MPs who oppose Mr Clegg's flagship reform of the second chamber, cancelling the critical second vote in the Commons.

The Tory rebels believe their symbolic victory means they will be able to prevent the measure making progress. After a dramatic day, the Bill was given a second reading by 462 to 124 last night – a Government majority of 338. In the biggest Tory rebellion since the last election, 91 Tories voted against the measure and an estimated 50 abstained – a sign of the trouble that lies ahead. Some 26 Labour MPs opposed the Bill.

Conor Burns resigned as a parliamentary aide to join the revolt and Angie Bray, another ministerial aide, was sacked for opposing the Bill. She said: "What we have got here is a capitulation. The Government whips have blinked first."

In a final attempt to salvage some reforms of the Lords, Mr Cameron and Mr Clegg will put pressure on Labour to support them in a crunch Commons vote in the autumn. But there is little sign the Opposition will rescue the Coalition from its turmoil over the Bill and Labour may opt to prolong the Government's agony.

An alliance between the Opposition and rebel Tories meant the Coalition faced certain defeat last night on a timetable motion to prevent opponents talking the Bill out by making marathon speeches.

Tory whips predicted the Coalition Government would suffer its first defeat by a margin of between 20 and 30 votes. Mr Cameron decided yesterday morning that delaying this critical vote until the autumn was the lesser of two evils. A reluctant Mr Clegg eventually agreed yesterday afternoon.

The Tory and Liberal Democrat leaders appear divided over the way forward. Mr Cameron intends to water down the Bill by the autumn to try to win over some of the Tory opponents.

That could include scrapping plans for peers to be elected under proportional representation to serve 15-year terms without facing the voters again. Another option would be stronger safeguards to prevent the second chamber challenging the supremacy of the Commons.

But Clegg aides insisted he would fight to preserve the current Bill and declared that it is "still alive" after what they called a "tactical retreat".

Senior Liberal Democrats renewed their threat to block Tory proposals if Mr Cameron fails to force his MPs into line. David Laws, the former Cabinet minister, said there could be "serious consequences", adding: "The important thing in coalition is that when you enter into these promises to each other you've got to keep them." Asked whether Mr Clegg blamed the Tories or Labour, his spokesman replied: "A plague on both their houses."

Although Mr Cameron was outgunned by his own backbenchers, last night's U-turn will be seen as a more severe setback for Mr Clegg, who hoped to win the 100-year battle to reform the Lords as part of his legacy. His prospects of securing historic change are less likely and he may have to settle for a much-diluted Bill.

Tory rebels hope the outcome will be a minimalist Bill which reduces the number of peers, removes the remaining 92 hereditary peers and ends patronage by having members appointed by an independent commission. They want to kill Mr Clegg's plan for 80 per cent of the members to be elected and now sense blood.

While ministers blamed their climbdown on Labour's decision to "play politics" with the issue, triumphant Tory rebels claimed the victory was theirs.

Jesse Norman, a normally loyal Cameron ally who was confronted by Tory whips in angry scenes last night after he led the revolt, said: "The Bill is a dead duck. The question is how long will the Government go on before it recognises that."

Lord Oakeshott, a Liberal Democrat peer, said: "This is now a real test of leadership for all three party leaders. Nick Clegg must hold his nerve. David Cameron must not cringe to the Tory dinosaurs now they have tasted blood. Most important of all, Ed Miliband must show he is a real reformer."