Calls were made for an immediate probe by a senior parliamentary committee, into the government's handling of the build-up to the US-led invasion in March 2003.
The debate underlines the growing opposition to British involvement in Iraq, where 120 of its soldiers have been killed since 2003 and another 7,200 of its troops remain.
The motion was proposed by the small Scottish and Welsh nationalist
parties in the lower House of Commons.
They were joined by MPs from the main opposition Conservative Party, which supported the war in 2003, and the second-largest political force, the Liberal Democrats, who opposed it.
The vote was defeated by 298 votes to 273, but Mr Blair’s Labour Party majority was more than halved to 25, as about a dozen lawmakers – dubbed “the usual suspects” - rebelled on an issue that has divided the party and eroded Mr Blair’s authority.
Earlier this year, he was forced to say he would step down as Prime Minister within 12 months, although he has refused to give a firm date.
In a stormy debate before the vote, the Opposition parties called for an examination of Iraq policy similar to the review being led in the United States
by former Secretary of State James Baker.
“If it can happen in the US, why not here?" asked Liberal Democrat
foreign affairs spokesman Michael Moore.
"We cannot allow the policy thinking and policy making to be carried out across the Atlantic and not here."
But Foreign Secretary Margaret Beckett said holding a probe now would damage the morale of British soldiers in Iraq, and embolden insurgents at a critical time when the fledgling government of Prime Minister Nuri al- Maliki needed full support..
"We are at what could potentially be a turning point in Iraq," she told
MPs, adding now was not the time "to rehash all the debates and
arguments that have been had over and over again".
Both she and Defence Secretary Des Browne hinted that the government may hold an inquiry at some point in the future.
However, the Defence Ministry later clarified the comments, saying there had been no change in government policy, and further inquiries had neither been ruled in nor out.
The Prime Minister has insisted he will hold to his strategy of keeping British troops in Iraq, until local forces are capable of ensuring security.
Tuesday's debate -- the first on Iraq for more than two years – followed revelations that the total cost of Britain's military involvement in Iraq
has passed ₤4 billion ($A9.8 billion).
Following the vote, the Liberal Democrats leader, Sir Menzies Campbell, conceded that Blair had won the battle, but not the political war.