The government has been defeated for the second time in its attempt to insist on licences for all pub entertainment, after the Lords reinstated a more liberal passage into the Licensing Bill last week.

The defeat could threaten the whole passage of the Bill if the government decides it wants to overturn the amendment again. If the Bill does not go through by the end of July, it could not come into effect until after the next general election.

The Lords has already amended the bill once to exempt small venues such as pubs from requiring entertainment licences for live music.

The government overturned the amendment in the commons, but last week, when the Bill returned to the Lords, peers voted in favour of a new amendment which said small premises where live music is provided to an audience of fewer than 200 and where entertainment finishes before 11.30pm would not have to obtain a local authority licence.

Since the Bill began in the House of Lords, the government cannot impose the Parliament Act to ignore peers' amendments completely. It runs the danger of getting involved in a game of parliamentary ping-pong, with each chamber overturning the other's amendments.

The government tried to insist last week that an exemption for small venues was "seriously misguided" and risked public safety. The new culture minister, Lord McIntosh, said the amendment "exposes the public and particularly children to great safety risks, leaves residents without a voice to protect against nuisance, and strips away the power of the police to control crime and disorder in vast swaths of venues, many of which may be totally unsuitable for the provision of entertainment."

However, the Tory culture spokeswoman, Lady Buscombe, dismissed Lord McIntosh's arguments, saying safety aspects and noise control were already covered by existing legislation. The Liberal Democrats' spokesman, Lord Redesdale, a champion of folk music, said: "We're being robust about this because there are implications for human rights and for live music all over the country. It will be interesting to see what the government does with this in a situation of ping-pong. Will they give up now they have seen the degree of feeling?"