Coalition plans to cap benefits will be implemented "in full" the Government insisted despite a stinging parliamentary defeat that saw a record rebellion among Lib Dem peers.
Work and Pensions Secretary Iain Duncan Smith wants out-of-work payments limited to £26,000 a year per household, which he claims will save "something in the order" of £600 million towards deficit reduction.
But the plans have caused deep unease in the Lords and prompted Church of England bishops to launch a bid for the reforms to be curbed, which was backed by a majority of 15.
Lord Ashdown, a previously loyal supporter of the Government, joined 25 other Lib Dem peers voting for child benefit to be excluded from the cap calculations.
The former party leader said that as president of the United Nations children's agency Unicef, he was not prepared to back the Government's plans in their current form, denouncing them as "completely unacceptable".
Despite the divisions in his own ranks, however, Deputy Prime Minister Nick Clegg has said he is fully signed up to the changes.
Bishop of Ripon and Leeds, the Rt Rev John Packer, who introduced the successful amendment, said: "It cannot be right for the cap to be the same for a childless couple as for a couple with children. Child benefit is the most appropriate way to right this unfairness."
The Government admitted it was "disappointed" by the result but insisted it still intends to push through its plans "in full".
A Department for Work and Pensions spokesman said: "There has to be a limit on the amount of money benefit claimants can receive. We think that limit is set at a fair rate of £26k - the equivalent to someone earning £35,000 before tax, a salary that many working families would be happy to receive."
Around 67,000 families will lose £83 a week under the cap, which is due to be brought in from 2013 in England, Scotland and Wales.
Prime Minister David Cameron insisted it was a "basic issue of fairness".
"It's time to call time on these excessive welfare payouts," he added. "That's what the benefit cap will do."
Labour backed the bishops' amendment despite supporting the principle of a benefit cap, insisting it would allow additional safeguards to be put in place when the proposals return to the Commons.
The party's own amendment - exempting those at risk of homelessness from the cap - was defeated by 250 votes to 222.