The Government is gearing up for a long and bitter battle with the House of Lords over its nationalisation of Northern Rock tonight after suffering two defeats in its bid to pass an emergency Bill.

Peers voted by 154 votes to 142 in favour of an amendment, opposed by the Government, to require the Bank of England to carry out an audit of the bank within three months of it coming to public ownership.

A second defeat was inflicted when an amendment to bring Northern Rock within the scope of the Freedom of Information Act was passed by 164 votes to 133, a majority of 31. That measure, sponsored by the Tories and backed by the Liberal Democrats, was opposed by ministers who believe opening up the bank's entire records to public scrutiny would leave it fatally compromised commercially.

The stage is now set for a lengthy "ping pong" battle between the House of Commons – where the Government can be assured of victory due to its majority along with Liberal Democrat support for nationalisation – and the Lords, where support is more evenly distributed.

Ministers rushed the Bill through the Commons in a single sitting earlier this week.

The Commons' sitting time, scheduled to end at 6.30pm today, will be extended until a resolution can be found.

Greg Hurst, Times political correspondent, said that the Lords were likely to eventually buckle after horse-trading over the emergency Bill's details.

"The Tories are against nationalising the bank, but the Liberal Democrats are in favour of it, so this is a battle at the moment over technicalities."

He said that the key disputes are whether Northern Rock should be subject to Freedom of Information legislation, like all public institutions, and a row over whether nationalisation would place it at an unfair commercial advantage over its rivals.

Among the bitterest arguments came over whether the bank would be subject to Freedom of Information legislation, with Tory Lord Hunt of Wirral complaining over the proposed exclusion.

"A nationalised Northern Rock will be unique. It is the very uniqueness of a nationalised Northern Rock that makes it imperative that there is sufficient transparency and accountability over its operations," he said. "Its directors’ salaries and bonuses will be paid out of taxpayers’ funds."

But Lord Davies of Oldham, representing the Government, said: "We are committed to the application of the Freedom of Information Act where it benefits the public, but there are areas which are excluded, and Northern Rock needs to be one of them. We want it to run like other commercial banks, at arm’s length from the Government.

"Maintaining commercial disciplines at Northern Rock and ensuring continuing of business will be critical. It is vital in the interests of returning it to the public sector that we do not apply inappropriate public sector requirements to it that do not apply to other commercial banks.

"The Treasury is the public authority subject to the Act and its relationship with Northern Rock as shareholder and lender will be in the public domain."

Earlier, a Tory attempt to make the Bill operative for a month, rather than a year, was defeated by 176 votes to 91. A second move, to exclude building societies from the Bill’s provisions, also fell.

The Commons was expected to reconvene later this afternoon, and send the bill back to the Lords, where it will be debated again in early evening.

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