David Cameron retreats on House of Lords reform

However, dozens of Conservative MPs and peers expressed their strong opposition to the proposal amid fears it would undermine the supremacy of the Commons.

Downing Street was forced to delay a key vote on the reforms last month to allow further discussion with the rebels. It is thought that Mr Cameron was prepared to water down the reforms to help win over more than 90 Tory MPs.

However, The Daily Telegraph has learnt that this has now failed and the reforms will be scrapped. Downing Street feared that debate over the reforms could drag on for months and alienate the public at a time when ministers should be focused on pulling Britain out of recession.

Last month, the Lib Dems warned of “consequences” if the Conservatives failed to back reform.

In an email to Lib Dem activists, Mr Clegg said: “When we return in the autumn to vote on this again, we fully expect the Conservatives to deliver this crucial part of the Coalition deal – as we have delivered other Coalition policies.” David Laws, a Lib Dem MP and former Treasury minister, said the stand-off over reform could lead to a “chain reaction” which threatened the rest of the Coalition’s programme.

Senior Tories and Lib Dems are currently drawing up an agreement on new Coalition policies for the next two years.

Mr Cameron will not back down on boundary reforms but senior Tories are discussing other policies which could be “offered” to the Lib Dems. A reform of political party funding or more support for green energy are thought to be on the table.

After the Olympics, he is expected to take a holiday and prepare for a relaunch of the Government.

A Downing Street spokesman said: “Discussions on Lords reform are ongoing and we will make an announcement when they are completed.”