Labour MPs turned on Tony Blair last night, rejecting the Education Bill and forcing him to rely on the Conservatives for support.
Mr Blair's reforms to secondary education were supposed to be the central plank of his third term in office, but 52 Labour backbenchers voted against them.
The scale of the rebellion was enough to rob Mr Blair of his majority in the House of Commons.
The Bill was saved by the Conservatives, who voted with the Government and ensured that it received a second reading.
Mr Blair's inability to pass legislation without the backing of the Opposition is a serious blow to his authority.
The Bill passed its second reading by 458 votes to 115. The Government won a separate vote on the timetable of the Bill by 300 to 290, with its majority cut to just ten.
At the Labour conference in Brighton last year, Mr Blair put public service reforms at the heart of his third-term agenda.
He told delegates: "Every time I've ever introduced a reform in government, I wish in retrospect I had gone further."
But Labour MPs including Lynne Jones (Lab Selly Oak), Clare Short (Lab Ladywood), Ken Purchase (Lab Wolverhampton North East) and Joan Walley (Lab Stoke North) voted against the Education Bill.
Others abstained, including Roger Godsiff (Lab Sparkbrook and Small Heath), Paul Farrelly (Lab Newcastle-under-Lyme) and Mark Fisher (Lab Stoke Central).
Two Midland MPs who had earlier opposed the proposals, Richard Burden (Lab Northfield) and Geoffrey Robinson (Lab Coventry West), voted with the Government.
The reforms include allowing parents, businesses and voluntary groups to set up trust schools.
Schools will be encouraged to set up federations with other schools and failing schools given a year to turn around or face being closed.
In a concession designed to win over Labour rebels, the Bill also contained measures to ban schools from interviewing parents and pupils, and selecting pupils by ability.
Speaking after the vote, Birmingham MP Steve McCabe (Lab Hall Green) said: "The vast majority of the Parliamentary Labour Party supported this Bill."
The PM must now walk a tightrope in the run-up to the final reading, as Labour MPs are likely to demand further concessions while Tory leader Mr Cameron will threaten to withdraw support if the Bill is watered down.