The government hoped the bill would boost promotion of the arts
Plans to replace Scotland's two main arts quangos with a new body have been thrown out by parliament.
Holyrood MSPs refused to back financial arrangements to set up the new body Creative Scotland, from the Scottish Arts Council and Scottish Screen.
It is the first time a Scottish Government bill has been rejected by the Scottish Parliament.
The SNP insisted the bill had been delayed, not killed off, and hit out at Labour for voting it down.
Even though MSPs backed the general principles of the legislation, they rejected its financial memorandum by 68 votes to 49, meaning the bill fell at its first parliamentary hurdle.
Labour's Ken McIntosh accused Culture Minister Linda Fabiani of trying to pull the wool over MSPs' eyes as they debated the bill at Holyrood earlier in the day.
I don't think the Labour Party thought through or realised the consequences for what they've done
Spokesman for the first minister
"In her opening statement, she led members to believe that the budget for the creative industries would be transferred from Scottish Enterprise to Creative Scotland," he said.
"In her summing up, she then clarified that no such budget would be transferred and that she was referring to a decision taken months ago to transfer the budget for the cultural enterprise offices."
The bill cannot be brought back to parliament for six months, according to Holyrood rules.
The Scottish Government accused Labour of "reckless opposition", saying the party had rejected plans which MSPs - and Scotland's arts sector - wanted to happen.
"I don't think the Labour Party thought through or realised the consequences for what they've done," said a spokesman for First Minister Alex Salmond.
The spokesman said Labour decided against honouring a procedural agreement which would have kept the bill alive.
The Scottish Parliament's finance committee earlier criticised the Creative Scotland Bill for being vague on financial details - concerns later echoed by the education committee, although MSPs backed it at the time.
Liberal Democrat culture spokesman Ian Smith said Ms Fabiani had added to the confusion.
He said: "Between her opening statement and her closing statement in the debate, she either changed the funding that was proposed to be transferred, or deliberately misled parliament."
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