Hong Kong legislators have rejected two proposals by the chief executive for limited reforms which pro-democracy activists say do not go far enough.
Hundreds joined a pro-democracy vigil outside the parliament building
In a late night session, they voted against expanding the Legislative Council, or parliament, by 10 seats.
Earlier they rejected a plan to double the size of the committee that elects the territory's next leader.
Hong Kong's leader, Donald Tsang, said the city had lost a "significant step" towards full democracy as a result.
Hundreds of pro-democracy demonstrators held a candle-lit vigil outside the LegCo building as the debate was held.
'Slap in the face'
The vote is a big set-back for Mr Tsang, who earlier said the reform plans went as far as Beijing and its allies in Hong Kong would allow.
He warned of a "serious split" in the territory over constitutional reform.
The BBC's Hong Kong correspondent, Chris Hogg, called the vote a "slap in the face" for the territory's new leader.
For the ideas to become law, Mr Tsang needed the support of at least 40 of the Legislative Council's 60 members.
The reform proposals have prompted noisy protests
Lawmakers voted 34 for and 24 against expanding LegCo from 60 to 70 seats, with one abstention.
The proposal to double the size of the election committee received only 34 votes, after 24 of the pro-democracy camp voted against.
Analysts predict the blunt message from the pro-democracy movement may deepen China's mistrust of political reform.
Anthony Cheung, a professor at City University of Hong Kong and member of Mr Tsang's cabinet, told the Associated Press news agency that Beijing could tighten its grip on Hong Kong.
He said: "Once you have universal suffrage, Beijing expects the democrats to win. But Beijing is not reassured that the democrats would be Beijing-friendly."
Since Hong Kong's sovereignty was handed back to China by Britain in 1997, the territory has been governed under a mini-constitution known as the Basic Law.
That stipulates that the chief executive should be elected by 800 people approved by Beijing. Although it states that the eventual aim is to introduce universal suffrage, it does not give a target date.
Mr Tsang had offered to double the size of the 800-strong election committee that will choose the territory's next chief executive.
He also wanted there to be 10 more seats in the next Legislative Council, which is due to begin work in 2008 - five directly elected, five elected from a pool of district councillors.
But the pro-democracy lawmakers complained they were being asked to support proposals that simply tinkered with the existing system - one that they regard as undemocratic.
Tens of thousands of people took to the territory's streets two weeks ago to demand full democracy.