More than 40 Labour rebel MPs opposed the Bill's third Commons reading on Wednesday. A rebel amendment to scrap England's 164 remaining grammar schools by 2010 was lost by 415 votes to 115.
Nine former ministers were among 69 Labour backbenchers who had backed an earlier amendment on Tuesday that would have required schools to ballot parents on trust status. But the Government enjoyed comfortable majorities thanks to the Tories.
Nick Gibb, shadow schools minister, said: "We are more government than the Government when it comes to this Bill."
The rebellion is a blow to Mr Blair's authority, but a Downing Street spokesman said: "The Prime Minister has always said the important thing is that the Bill is passed and will raise standards for schools and their pupils."
The revolt coincided with an ICM poll for the Guardian which revealed that the public now believes that the Conservatives have better education policies than Labour. The Government enjoyed a 10-point lead over the Tories on education at the general election a year ago, but is now two points behind. Its latest schools policies triggered a wave of opposition when they were unveiled in a white paper in October.
The main points include:
* Promoting trust schools - state-funded independent schools that decide their own admissions, and can be controlled by outside organisations, such as businesses or charities.
* Giving failing schools a year to improve or face closure.
* New powers for councils to intervene over failing schools.
* A clear legal right for school staff to discipline pupils.
* A new pupil entitlement to specialised 14-19 diplomas.
Alan Johnson, the Education Secretary, sought to address concerns over trusts that run schools with assurances that they would be inspected by Ofsted.
And he said: "Rather than sounding the death knell for local-authority involvement in education, as some have suggested, if anything, the Bill marks a rebirth of their role."