The Government suffered a shock defeat in the Commons today when a Liberal Democrat bid to scrap new settlement rules for Gurkha veterans was backed by a majority of 21.

Voting for the motion to allow all Gurkhas equal residence rights was 267 to 246 - amid shouts of "resign" from the Opposition benches.

It was the first major reverse for Gordon Brown since he became Prime Minister but has no legally binding effect on Government policy.

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Facing a backbench revolt, the Government came up with two concessions to try to stave off defeat.

Firstly, the Prime Minister repeatedly promised a review of the criteria - now expected to start before the July recess.

And Home Secretary Jacqui Smith followed this up with a letter to leading Labour critic Martin Salter pledging no deportation of Gurkha soldiers.

Mr Salter (Reading W) swiftly hailed the move as evidence that last Friday's announcement of new settlement guidelines was not the Government's "final word" on the issue.

But in a crucial Commons vote, and with actress and pro-Gurkha rights campaigner Joanna Lumley watching from the public gallery, the Liberal Democrat move to extend equal rights of residence to all Gurkhas was carried.

Dozens of Labour rebels had signed up to an amendment to the Lib Dem motion also demanding the "restrictive, morally wrong and offensive" guidelines were scrapped.