Peers have rejected for a fifth time government plans to force passport applicants to get ID cards.
Labour's manifesto promised ID cards would be voluntary
They voted by 219 to 191 - a majority of 28 - to back an alternative scheme to allow people to "opt out" when cards are introduced from 2008.
The Lords say the government's plan is not "voluntary", as promised in Labour's election manifesto.
The Identity Cards Bill now returns to the Commons, which voted in favour of it for a fourth time last Tuesday.
Home Office minister Andy Burnham earlier said it had been "absolutely clear" from before the election that the cards would be linked to passport applications.
The government says the bill, backed by MPs, must be passed in its entirety.
They add that, as it is not compulsory to hold a passport, neither is getting an ID card.
The amendment, which the government does not accept, which would allow those applying for new or renewed passports to decide for themselves whether to opt for an ID card until 2011.
Mr Burnham told BBC Radio 4's Today programme that before the general election, the government had been "absolutely clear" that the cards would be compulsory.
"There was no doubt about the link with the passport," he said.
"We said all along that the right way to proceed would be at the time when we introduced the biometric passport, when fingerprints were introduced in the passport - that would be the right time to introduce the clean National Identity Register."
Lady Park, a Tory peer and former senior MI6 officer, told Today she could not see a reason why the scheme should be compulsory.
She feared it would "cause a marvellous opportunity for identity theft", financially, commercially, but also for unfriendly groups and foreign services who "will find every bit of information they need about somebody to create identity theft".
Lib Dem home affairs spokesman Lord Phillips has accused the government of "bullying" peers over the ID cards issue.
But Commons leader Geoff Hoon said the Lords should "accept the will of the elected chamber".
In theory, the bill could keep "ping-ponging" between the houses until an agreement is reached, or ministers could override the Lords using the Parliament Act.