Police will get new powers under the bill
Home Secretary David Blunkett had refused to water down plans on the issue as his anti-terror plans pass through the Commons.
Twenty-one Labour rebels voted against the plans for new laws banning such incitement and MPs continue to debate the Anti-Terrorism, Crime and Security Bill.
Some Labour MPs with Muslim communities in their constituencies, including former minister Gerald Kaufman, were among those to back the latest part of the bill to cause controversy.
Telling how he had experienced anti-Semitism as a practising Jew, Mr Kaufman said action against religious hatred was long overdue.
The anti-terror laws were drawn up in the wake of US terror atrocities, whose aftermath saw attacks on some Muslims in the UK.
'Counter productive'
Shadow home secretary Oliver Letwin warned the anti-hatred plans could prove counter-productive because they could prevent legitimate debate about religion.
Although action was much needed, he argued that the "ill conceived proposals" failed to distinguish between race, which people could not alter, and religion.
"Religion, like politics, is a matter of argument and people are intemperate in their expression," continued Mr Letwin.
Lib Dem home affairs spokesman Simon Hughes chose another line of attack, saying efforts to stamp out religious hatred should not be linked to the 11 September atrocities.
Arguing the issue ought to be tackled separately, Mr Hughes said the plans were not the best way of protecting religious minorities.
Despite the criticism, Mr Blunkett stood by his proposals, although he was willing to see the new law reviewed after two years in force.
He said too much "nonsense" had been spoken of the plans and he dismissed the claims that have been made by Blackadder star Rowan Atkinson that they threatened to prevent jokes about religion.
'No comedy threat'
"Jokes and amusing behaviour, the criticism of people's religion, the way in which people express their own religion, will not and is not intended to fall foul of these particular measures," said Mr Blunkett.
Instead the new laws targeted hatred stirred up by groups such as the far right British National Party, explained the home secretary.
While the government is expected to use its huge majority to get the bill through the Commons on Monday night, more obstacles await it when it goes to the House of Lords on Tuesday.
Earlier, Mr Letwin told BBC News he was worried the government was sneaking through new powers for the police to get confidential information under the guise of fighting terrorism.
The Tory spokesman hoped the Lords would insist on some amendments.
Mr Blunkett has also come under pressure to ditch proposals to imprison foreign terrorist suspects without reference to the courts.
Liberal Democrat leader Charles Kennedy has warned his party's MPs would vote against the bill on Monday and stall its progress in the Lords, unless the government "retreats" on the issue.
Mr Kennedy said the plans would mean "suppressing our own individual rights" and hand a victory to the people behind the 11 September attacks.
He said his party agreed with "quite a lot" of the government's proposals, but more attention needed to be given to getting the "balance right".