The government has been defeated in Parliament over its negotiating position on the EU budget.
Rebel Tory MPs joined with Labour and other parties to pass an amendment calling for a real-terms cut in spending between 2014 and 2020.
The coalition says it must be frozen in real terms as a minimum.
The amendment, passed by 307 votes to 294, is not binding on ministers, but is a blow to David Cameron's authority on Europe before key talks next month.
The rebel amendment calling for a real-terms reduction in EU spending was passed after a stormy debate in Commons on the EU's next seven-year budget and UK contributions.