Fears that new laws would force schools to get licences to put on nativity plays have led to the government being defeated in the House of Lords four times.
Ministers say nativity plays will not be affected
Opposition peers voted by 169 votes to 107 to exclude schools from the provisions of the Licensing Bill, which is aimed at shaking up the UK's outdated drinking laws.
The defeat came despite warnings the exemption could leave university nightclubs free of licensing controls.
Ministers have accused the Conservatives and Liberal Democrats of propagating "myths" about the bill, especially about its effect on live music acts in pubs.
Ahead of Monday's debates, Tory spokeswoman Lady Buscombe told BBC News Online her party backed the bill in principle but believed ministers were squandering a key opportunity for change.
Lady Buscombe said the current wording would make schools apply for an entertainment licence if a nativity play, for example, was attended by more than just pupils' families - because of public safety concerns.
"The point of the bill is that it is supposed to be deregulatory but it's not: it's adding unnecessary layers of bureaucracy."
Culture Minister Kim Howells has accused opponents of spreading "myths"
Her amendment, backed by the Lib Dems, excluded "educational establishments" from the bill.
But Culture Minister Baroness Blackstone insisted the bill would not impose any extra burdens on schools, who were currently not excluded from licensing laws.
Schools would not have to apply for licences under the new laws if charges for entertainment events were only levied to cover production costs, she said.
"The vast majority of school activities of this kind would be exempt," she said.
Student union fears
Lady Blackstone accused the Tories of being "reckless" because the scope of their amendment would go far beyond school plays.
It could even mean nightclubs run by students unions - prompting concerns about alcohol consumption, noise and drugs - would not need licences, she suggested.
"Just because these activities are taking place in schools, it does not mean the public should not be protected," she added.
The government now looks set to try to overturn the defeat when the bill next goes before MPs.
Billy Bragg and MPs complain pub singers could be gagged
Earlier, opposition parties accepted a government change to
exclude religious places of worship from the new entertainment licence rules.
Much of the criticism of the bill has surrounded plans for pubs and nightclubs to get new-style licences to put on live entertainment.
The government is tabling an amendment to its bill to ensure bands and solo acts are not punished.
But ministers were defeated by opposition peers who backed by 151 votes to 115 a Lib Dem amendment to exclude most unamplified live music from the new laws.
Ministers believe the change does not leave councils with enough flexibility for each case and are likely to try to overturn the defeat in the Commons.
The government suffered a third defeat over a Lib Dem motion to set up a central authority in charge of licensees.
Peers backed the amendment by 143 votes to 111 - a majority of 32.
A fourth defeat then followed as peers backed an amendment that would put a new duty on the licensing authority to protect the "amenity and environment" of local residents.