The US Senate has rejected an attempt to reauthorise several sections of the main US anti-terror law.
Democrat Patrick Leahy said more checks and balances were needed
A bipartisan group of senators opposed the Patriot Act measures as infringing too much on Americans' civil liberties.
The bill's supporters in the Senate were able to muster only 52 of the 60 votes needed to stop it being blocked.
The vote is a blow to President George Bush and Republican leaders, who had pushed for most of the expiring Patriot Act provisions to be made permanent.
Unless a compromise is reached, several key parts of the legislation, passed after the 11 September 2001 attacks, are due to expire at the end of the month.
White House spokesman Scott McClellan said Mr Bush was determined to maintain a law that had helped break up some terror cells in the US.
"The president has made it very clear that he is not interested in signing any short-term renewal," he said.
"The terrorist threats will not end at the end of this year, they won't expire in three months. We need to move forward and pass this critical legislation."
'Checks and balances'
The White House had lobbied determinedly for the provisions to be passed and hoped to satisfy critics by adding new safeguards and expiration dates for the most controversial elements.
These include roving phone taps and secret warrants for documents from businesses and hospitals, and for records of library books taken out by private citizens.
Senate Majority Leader Bill Frist warned: "We have more to fear from terrorism than we do from this Patriot Act."
Homeland Security chief Michael Chertoff has backed the powers
But the Republican majority failed to get the 60 votes needed in the Senate to prevent a threatened filibuster, a technique used to delay debate and stop the bill's passage to law.
During the debate, senior Democrat Patrick Leahy called out: "It is time to have some checks and balances in this country. We are more American for doing that."
It came as the New York Times reported that Mr Bush had allowed security agents to eavesdrop on people inside the US without court approval after 9/11.
US Secretary of State Condoleezza Rice said he had done nothing illegal. She did not address the specifics of the report.
Republican and Democratic opponents of the legislation said they could swiftly reauthorise the legislation if it were altered to give greater protection to civil liberties.
The BBC's James Coomerasamy in Washington says the vote against extending the 16 provisions in question is the second embarrassing climb-down for the White House in 24 hours.
On Thursday, it was forced to accept a bill sponsored by Republican Senator John McCain which explicitly bans cruel, inhuman or degrading treatment of terrorist suspects.
These developments seem to reveal a growing and potentially significant split between Congress and the White House over the balance to be struck between ensuring the nation's security and protecting civil liberties, our correspondent says.