Plans for late-night drinking are in jeopardy following opposition in the House of Lords.
The government was narrowly defeated this week when peers voted 112 to 111 to give local councillors, MPs and MEPs the right to formally object to applications for extended drinking hours in pubs.
The amendment comes as a blow to those in the trade who expected the new licensing reforms to allow pubs to trade longer under a simplified application process.
Under the original plans applications would be accepted unless residents objected.
Opposition peers said plans to allow people to drink into the early hours threaten to make the lives of people living near pubs a misery.
Tory Baroness Peta Buscombe introduced the amendment during the committee stage of the Licensing Bill.
She told thePublican.com: "I feel that local councillors should be able to make representations for residents.
"We wanted to balance the interests of the industry and local residents. Local councillors can act as a sensible buffer between individuals in the community who may want to cause trouble and local publicans.
"We recognise there is a need for impartiality and those councillors who make representations should not be allowed to be a part of the decision making process.
"Local councillors are interested in their residents but they recognise local businesses are just as important."
Trade leaders fear that this decision will lead to political interference and extra red tape.
Karen Kelshaw, communications manager at the British Beer and Pub Association, said: "The defeat is something we are looking to overturn.
"We feel that local authorities shouldn't have the power to be both judge and jury when it comes to applications.
"It is better to leave it as the government wanted in the first place."
Nick Bish, chief executive of the Association of Licensed Multiple Retailers, said: "We would not want councillors sitting in judgement on licensing decisions.
"We don't like the amendment but we are confident the government will overturn the decision when the bill reaches the House of Commons."
A spokesman from the Department for Culture, Media and Sport said: "We do not support the amendment which would, if it became law, give councillors, MEPs and MPs the right to make representations, in their own right, on licensing applications. "MPs should not be able to override the views of local residents although, of course, councillors, MPs and MEPs may represent their constituents when requested to do so."
Lib Dem peer Lord Redesdale said his party wanted the UK to have a more responsible approach to nightlife.
"But we must make sure that there are strong safeguards to prevent the general public suffering from some of the drunken excesses we have seen in our inner cities," he said.
"An overwhelming amount of concern has been expressed by people who have suffered broken nights' sleep from noise caused by people leaving pubs and clubs."