This evening MPs voted 309 to 305 in favour of an amendment to the EU Withdrawal Bill.
This has dashed Mrs May’s plans for a take-it-or-leave-it final Brexit vote, with MPs now able to suggest new terms of Britain’s EU exit.
This will slow down the Brexit process and comes ahead of tomorrow’s key EU Summit – where the go-ahead was due to be given to talks progressing to trade.
Several rebel MPs from Mrs May’s Tory party helped push through the amendment, helped by all opposition parties.
Labour leader mocked Theresa May after the result, staying the defeat was “humiliating”.
FOLLOW LIVE REACTION TO VOTE HERE
Theresa May has lost a key vote on a Brexit amendment
Even hard-line Brexiteers including Jacob Rees-Mogg had warned the Government the controversial Clause 9, which has now been overruled, went to far.
The so-called Henry VIII powers were defended by Government ministers during an afternoon-long debate in the House of Commons today.
But their pleas for support has fallen on deaf ears with Mrs May now facing a scramble to agree a final exit deal with the EU.
Conservative former attorney general Dominic Grieve led the rebellion via his amendment seven, which would require any Brexit deal to be approved by a separate act of Parliament before it could be implemented.
He warned ministers they had “run out of road” and drew upon Winston Churchill’s spirit as he said he intended to put “country before his party”.
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Minutes before the vote, Justice minister Dominic Raab sought to appease would-be rebels by saying the Government would rewrite the Bill to guarantee concessions it had offered but was faced with shouts of “too late” by some MPs on his side.
While some would-be rebels such as George Freeman and Vicky Ford said Mr Raab’s promise of fresh limits on powers in the Bill was enough for them to back down, it was not enough for the Government to avoid defeat.
Tory rebel Nicky Morgan tweeted: “Tonight Parliament took control of the EU Withdrawal process.”
Jeremy Corbyn said the defeat was “humiliating” for Theresa May.
The Labour leader said: “This defeat is a humiliating loss of authority for the government on the eve of the European council meeting.
“Labour has made the case since the referendum for a meaningful vote in parliament on the terms of Britain’s withdrawal from the European Union.
“Theresa May has resisted democratic accountability. Her refusal to listen means she will now have to accept parliament taking back control.”
And European Parliament’s chief Brexit negotiator has tweeted a mocking response to this evening’s result.
He wrote: “British Parliament takes back control. European and British Parliament together will decide on the final agreement.
“Interests of the citizens will prevail over narrow party politics. A good day for democracy.”
Theresa May and her husband Philip at an awards ceremony this evening
Tory MP for Wimbledon Stephen Hammond voted against the Government. In the past few minutes he has been sacked from his position as deputy chairman of the Tory party.
Mr Hammond said: “It’s disappointing, it gives me no pleasure to vote against the Government but I’ve made it very clear that for me, this was a point of principle and just occasionally in one’s life one has to put principle before party.
“I know that sounds pompous but I’ve never done it before.
“I think the Government could have been a little bit swifter of foot, I think there was a way out of this, we were all very close but the Government chose not to move that way.”
A Government spokeswoman said: “We are disappointed that Parliament has voted for this amendment despite the strong assurances that we have set out.
“We are as clear as ever that this Bill, and the powers within it, are essential.
“This amendment does not prevent us from preparing our statute book for exit day. We will now determine whether further changes are needed to the Bill to ensure it fulfils its vital purpose.”
David Davis being driven from Westminster this evening
And former Ukip leader and MEP Nigel Farage tweeted his fury at “career politicians” following the vote.
He wrote: “My contempt for career politicians knows no bounds.”