The Bill, which had been amended to shield small deposit holders from the deposit tax, was later rejected with 36 votes against, 19 abstentions and zero votes in favour. One deputy was absent.
Hundreds of protesters outside cheered and sang the national anthem when they heard the Bill had not passed.
The result came as a plane carrying 1m euros (£852,600) took off for Cyprus as a “contingency measure” to help troops and their families.
The Ministry of Defence (MoD) said the RAF flight, which left yesterday afternoon, will provide people with emergency loans in the event that cash machines and debit cards stop working completely.
The MoD said it is determined to minimise the impact of the Cyprus banking crisis on “our people” and it will consider further shipments if required.
The announcement came amid moves by the Government to re-assure UK troops posted to Cyprus that they will be fully compensated if bank accounts on the Mediterranean island are raided.
The MoD said that as well as sending out the emergency fund, it is asking personnel if they would prefer this and future months’ salaries to be paid into UK bank accounts.
In the meantime, Cyprus will now have to come up with an alternative plan to raise the money.
Unless it does so, the country will not qualify for external rescue loans, its banks will face collapse and the nation could go bankrupt.
“No to new colonial bonds, no to subjugation, no to national dishonour and raw blackmail,” said house speaker Yiannakis Omirou during the debate before the vote.
After the proposal was defeated, he said political leaders will meet the president today to discuss the next step.
Nicholas Papadopoulos, the chairman of the parliamentary finance committee, said banks would remain closed “for as long as we need to conclude an agreement”, but stressed this would be “in the next few days”.
Banks had been ordered to remain shut until tomorrow while the Bill was debated and amended, to prevent a run on the banks.
Mr Papadopoulos said Cyprus wanted a renegotiation of its bailout deal.
But the idea of seizing savings was something Cyprus rejected. “It has not been (implemented) in any other country in Europe and we don’t wish to be the experiment of Europe.”
Under the original deal, reached in Brussels late on Friday, to qualify for the 10bn euro (£8.5bn) bailout from other eurozone countries and the International Monetary Fund, Cyprus had to raise 5.8bn euro (£5bn) by taxing all bank accounts.
Those with less than 100,000 euro (£85,000) would pay 6.75 per cent, and those above that amount would be taxed at 9.9 per cent on any deposits.
Facing fury from voters and from Russians who make up an estimated third of the total amount in Cypriot banks, the government amended the Bill earlier yesterday to exempt smaller depositors each with less than 20,000 euro (£17,000) in the bank.
However, that change was not enough for politicians.
The country’s central bank governor, Panicos Demetriades, had recommended that no accounts less than 100,000 euro be taxed – the amount supposedly insured by the state if a bank was to collapse.
“The credibility of, and trust in the banking sector depends on this,” said Mr Demetriades.
Although Cyprus is the smallest eurozone country to be bailed out, the plan sent shockwaves through the single currency area as the first to target bank accounts.
Other bailed out countries such as Greece, Ireland and Portugal have raised funds by imposing new taxes.
Proponents of the deposit seizure argued it would have made foreigners who have taken advantage of Cyprus’s low-tax regime share the cost of the bailout of the banks, which have been hit hard by their over-exposure to bad Greek debt.