Peers have backed a compromise proposal which allows parents to smack their children with moderation.
Parents could be prosecuted if they cause 'actual bodily harm'
The change to the Children Bill outlaws smacking in England and Wales if it causes harm such as bruises, reddening of the skin or mental harm.
But peers rejected calls for a complete ban on smacking of children, which had been opposed by the government.
The compromise, tabled by the Liberal Democrat Lord Lester, was approved by 226 votes to 91 on Monday evening.
Before the votes, a spokesman for Tony Blair said the government wanted to achieve a balance between parents' right to discipline and protecting children.
"We do not want to criminalise parents so we are opposed to an outright ban," he added.
Ministers have been accused of reneging on a pledge to outlaw smacking by telling peers to oppose the complete ban, and by giving them a free vote on Lib Dem Lord Lester's amendment.
His amendment allows "moderate smacking" but removes the defence of "reasonable chastisement".
Ministers feared an outright ban would lead to a flood of prosecutions over minor offences.
Health Secretary Dr John Reid said he believed most people would back the government's approach.
But Mr Rushdie, who supports Children are Unbeatable, an umbrella group for more than 350 organisations campaigning for a complete ban, said the government had pledged a ban six years ago.
"Our view is quite simple - there is a human rights issue and this is not a question of nannying it's a question of increasing personal freedom ... that's to say to give children the personal freedom not to be hit," he told BBC Radio 4's Today programme.
Conservative spokesman Theresa May said her party did not have an official "position" on smacking, preferring to leave it up to individuals' conscience. She said she personally did not support a total ban.
The official Lib Dem policy is to give children equal legal protection from assault as adults.
The party's children's spokeswoman in the Lords, Baroness Walmsley, is backing a complete ban on smacking.
She said: "Assaulting a child is as unacceptable as assaulting an adult, and the law should clearly say so."
Under a definition of "reasonable chastisement", dating back to 1860, parents can currently use a degree of force to discipline their children.
Under Lord Lester's amendment, any parent who inflicted actual bodily harm on a child could be prosecuted and would no longer have the protection of the defence.
Supporters of removing the "reasonable chastisement" defence say it is often used by parents as their defence in cases involving abuse.
More than 200 peers and MPs, including many from the Labour side, signed up to a campaign to amend the current Children's Bill passing through Parliament.
The Bill puts into effect recommendations from the inquiry into the death of Victoria Climbie, who died after repeated abuse.
Labour MP David Hinchliffe, who chairs the Commons select committee on health and used to work in child protection, has said the child protection agencies "are working with one arm tied behind their back" with the "outdated" current law.
He told BBC Radio 4's World at One that a number of members of Tony Blair's Cabinet privately supported an outright ban.