Plans to make it a criminal offence to deliberately copy registered designs could put off young designers, Labour has said.
Under proposals put forward in the Intellectual Property Bill in the House of Lords, designers caught knowingly copying someone else's work could face up to 10 years in prison.
Ministers want to bring in the same protections for registered designers as currently exist for those who are able to protect their work through copyright law or the use of trademarks.
But shadow business spokesman Lord Stevenson of Balmacara said the changes could have a "chilling effect" on young British designers if they feared going to prison for unintentionally copying another person's work and could discourage investors from supporting the UK's creative industries.
The Labour peer tabled an amendment to the Bill, which was defeated by the Government by 233 votes to 153, majority 80, yesterday afternoon.
It sought assurances that only those who deliberately copied work would face criminal sanctions and designers who had unintentionally copied someone else's work would not be prosecuted.
Speaking in the Lords, the peer said it was telling other countries such as the USA, Australia and India had not introduced such penalties.
He said: "There is a real concern that the legislation as currently drafted will open a Pandora's Box of unintended consequences, potentially discouraging the very kind of legitimate, competitive risk-taking that policy makers have been keen to encourage as a driver of growth.
"The arguments that the Government have deployed up until now are deeply flawed. They say that the treatment of design rights needs to be brought into line with existing copyright and trademark legislation; that there is an anomaly between the application of criminal sanctions for copyright and trademark infringements and the lack of equivalent provisions to stop the copying of registered designs.
"There is another danger: the risk of exposing small and independent designers themselves to criminal prosecutions. Small companies will be less able to afford prior rights searches and legal support, leading to a greater risk of wrongful conviction. Cases of this kind would be likely to have a serious chilling effect on the UK's design industry.
"The uncertainty that would be created by criminal measures would discourage large multi-national companies from investing and commissioning design in the UK, given the legal risks.
"This deterrent for inward investment in UK design may not only result in an innovation drought by may also threaten the employability of UK designers."
But Tory business spokesman Viscount Younger of Leckie said that under the legislation anyone who had incidentally copied a design would not face prosecution, saying the Bill would "create a more coherent approach to the protection and enforcement of designs, trademarks and copyright in the UK".
He added: "It should help to reduce the blatant copying of registered designs by acting as a deterrent. Because the offence has been drafted to require an element of active knowledge to be found guilty, it should be the case that accidental use will not be caught."