Deputy Prime Minister Nick Clegg, the Liberal Democrat leader, said the coalition formed in 2010 had now entered new territory, though he said he would not bring down the government by withdrawing his party's overall support.
Stung by the humiliation of announcing the demise of a reform his party has championed for over a century, Clegg said his party would retaliate - by opposing boundary changes to Britain's constituencies that would have benefited the Conservatives in an election in 2015.
By blocking boundary changes to the constituencies that elect lawmakers to the House of Commons, Clegg is potentially seriously damaging Cameron's future electoral prospects as the changes were widely forecast to benefit his party.
Blow to Cameron
The rebellion is a potentially serious blow to Prime Minister David Cameron who is trying to hold the coalition together at a time when public anger at the sickly state of the economy is high and the opposition Labour party is ahead in the polls.
"The Conservative party is not honoring the commitment to Lords reform and, as a result, part of our contract has now been broken," Clegg told reporters at a hastily convened news conference. "We are in slightly new territory."
Steven Fielding, a politics professor at Nottingham University, said Clegg's rebellious riposte was probably the only way he could have responded.
"It probably guarantees the coalition will continue, but probably not as the vital force we saw in 2010," he said.
The development means that the House of Lords - the unelected upper chamber of the British parliament - is unlikely to be reformed anytime soon despite widespread criticism that most of its members are political appointees and that the so-called hereditary peers owe their seats to an accident of birth.
Although the chamber does not have the power to initiate new legislation, it scrutinizes new laws and can seriously delay them or propose serious changes to them.
The scuppering of Lords reform, a key plank of the coalition agreement struck in May 2010 with Cameron's Conservatives, is particularly damaging for Clegg as it fuels the perception that the Liberal Democrats have gained little from going into government with a party that was not their ideological ally.
Clegg said his working relationship with Cameron was "fine" but the strains of the row over Lords reform could usher in what some Liberal Democrats have warned could be a chain reaction of disagreements between the coalition partners.
That could reduce Cameron's already limited room for maneuver as he grapples with spending cuts and a €2 trillion economy which has contracted for the past three quarters.
Government in place until 2015
However, neither governing party is eager to sink the coalition and spark an election during a recession, and while polls show both parties are unpopular.
Fielding said Clegg had probably done enough to fend off internal dissent and secure the coalition's immediate future. "In terms of how it is presented to the public, it looks grubby, incoherent, very divided, a bit of a mess," he said.
Dropping Lords reform is especially difficult for his party because he backed an unpopular proposal to increase university tuition fees as part of the coalition deal, a move that saw the Liberal Democrats hemorrhage support in opinion polls.
"Clearly I cannot permit a situation where Conservative rebels can pick and choose the parts of the contract they like, while Liberal Democrat MPs (members of parliament) are bound to the entire agreement," Clegg said.