The Australian government has withdrawn a controversial bill to process all future asylum seekers arriving by boat in offshore camps.
Mr Howard had been accused of trying to appease Indonesia
The legislation was due to go to the Senate, but a revolt by ruling party lawmakers forced Prime Minister John Howard to cancel the vote.
It was Mr Howard's biggest setback in a decade in power, correspondents say.
The bill had sparked considerable debate, with three government lawmakers opposing it in the lower house.
The legislation passed the lower house, where the ruling Liberal/National coalition has a comfortable majority. It was then due to go to the Senate, where the government only has a majority of one.
Mr Howard said the government cancelled the vote because an unspecified number of government senators planned to oppose it.
"It was clear that the legislation was going to be defeated," he told journalists.
Refugee groups had spoken out against the proposed new laws.
Under current legislation, only people who arrive on outlying islands or are intercepted at sea have their claims for Australian asylum processed off-shore.
Australia angered Jakarta by accepting Papuan refugees
Those arriving on the mainland have their cases handled inside the country, under the Australian legal process.
The new legislation would have meant that all arrivals by boat would be sent off-shore, mainly to the island state of Nauru.
Even if their claims for refugee status were accepted, it would have been unlikely that any of the boat people would have been allowed to settle in Australia.
Critics had also accused John Howard of using the bill to heal rifts with Indonesia.
A recent decision to accept about 40 Papuan asylum seekers angered Jakarta, which said that by giving the group refugee visas, the Australians were showing tacit support for Papuan independence.
Papua was granted self-rule by its Dutch colonists in 1961, but was then annexed by Indonesia. A low-level insurgency has been going on in the province ever since.
But Mr Howard told journalists the bill was not aimed at appeasing Indonesia.
"This bill was not designed to get a tick in Jakarta," he said.