Gordon Brown was struggling to maintain his authority over Labour MPs last night after suffering a shock Commons defeat on restricting the right of former Gurkhas to settle in Britain.

Twenty-seven Labour MPs voted against the Prime Minister and dozens abstained in favour of a Liberal Democrat motion that would give all Gurkhas who have served in the Armed Forces an equal right of residence.

Mr Brown could face further embarrassment today when MPs hold a series of votes about reforms to their expenses and allowances. He has already endured the humiliation of having to drop last week’s proposal of a £150 daily attendance allowance to replace the second-homes allowance.

Labour MPs despaired of the Government’s handling of both issues. One said: “It’s an end-of-empire kind of event, the sort of thing that happens when a government is in decline.”

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An appeal on behalf of Britain's staunchiest allies was launched, with the feeling that this was not a request for charity, more of a debt of honour

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Yesterday’s defeat by 21 votes occurred in chaotic circumstances and appeared to take government whips unawares. It is the first time in living memory that a government has lost a vote in an opposition-inspired debate.

Late in the debate Jacqui Smith, the Home Secretary, rushed out a series of concessions to Labour MPs to speed up a review of new rules on Gurkhas announced last Friday. They went beyond hints offered by Mr Brown at Prime Minister’s Questions and included an assurance that no Gurkhas currently in the UK would be deported.

Her e-mail was sent during the debate and read out in the Commons, but many of the rebels were not in the chamber and went straight to the division lobbies. Some said that they had not been aware of Ms Smith’s move.

Phil Woolas, the Immigration Minister, was forced later to make an emergency Commons statement hinting that the Government would make it easier for the 36,000 ex-Gurkhas discharged before July 1997 to settle here.

During the debate Mr Brown had to watch as David Cameron and Nick Clegg, the Liberal Democrat leader, lined up against him.

The outcome was a dramatic boost for the troops from Nepal, who have pursued their demand for the right to settle through the courts for years.

Among Labour MPs voting against the Government were the former Cabinet minister Andrew Smith, the Home Affairs Select Committee chairman Keith Vaz and Stephen Pound, who quit as a parliamentary private secretary to back the opposition motion.

After the vote, the actress Joanna Lumley was outside Parliament flanked by cheering Gurkhas. “I can’t tell you the sense of elation, the sense of pride – pride in our country, pride in the democratic system and pride in our Parliament – we can change things,” she said.

Madan Kumar Gurung, 57, from Reading, Berkshire, who served as a Gurkha for 24 years, said: “I would like to thank the loving and lovely people of Britain from the bottom of my Gurkha heart. Having fought so hard it is a great feeling to know that my colleagues will be able to stay.”

Rai Birbahdui, 72, from Dover, Kent, who fought in Malaysia, Hong Kong and Brunei, said: “Today we have rights and we are happy.”

Mr Cameron said: “The basic presumption that people who fight for our country should have a right to come and live in our country has been set out very clearly. The Government has now got to come back with immediate proposals so that those Gurkhas who have been waiting so long for an answer can have that answer.”

Mr Clegg hailed the vote as “a great day for everyone who believes in fairness and decency in this country”. He added: “People who are willing to die for our country should be allowed to live in our country. The Government must listen to Parliament and scrap these shameful rules immediately and grant justice without conditions to all retired Gurkhas.”

The Home Office announced last week that strict criteria would be applied to settlement claims for Gurkhas discharged before July 1997. Applicants would be judged according to length of service, bravery medals and service-related medical conditions. Campaigners said that these rules would allow only about 100 of 36,000 veterans to settle here.

Under the changes signalled by Mr Woolas, the cases of the 1,500 pre1997 Gurkhas who have applied for citizenship will be determined by the end of next month. About 200 are already in the country and will be allowed to stay. Proposals to change last week’s rules will come before summer recess. Earlier Mr Brown had suggested that the Government could not afford an open-door policy for pre1997 Gurkhas. Damian Green, the Shadow Immigration Minister, said that the Government’s attitude was “unfair, ungenerous and unacceptable”.

MPs will vote today on expenses. The Tories could back a motion proposed by the Commons standards committee to delay all reforms until an independent review is published.

Soldiers spurned: rules that were branded a betrayal

Under the Government’s policy, set out on Friday, settlers must fulfil one of these criteria:

— Three years’ continuous residence

— Close family in Britain

— A level 1-3 bravery award (including VC, DSO or MC)

— 20 years’ service

— A long-term condition caused or aggravated by service In addition they will be allowed to settle in Britain if they meet two or more of the following criteria:

— They were previously awarded an MoD disability pension but no longer have a chronic medical condition

— Have a mention in dispatches

— Service of ten years or a campaign medal for active service in the brigade

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