The $13 billion takeover of the Murray-Darling Basin is in doubt after the federal government used its numbers to override Senate changes to the plan.
Opposition and crossbench senators - including the Greens - combined to amend the government's takeover bill last week, blocking Victoria's controversial north-south pipeline.
The Victorian government is building the pipeline to carry up to 75 billion litres out of the basin to Melbourne every year.
But on Monday, Labor used its numbers in the lower house to defeat the changes.
The bill will now return to the Senate where the coalition says it will insist on the amendments. If Labor does not accept the changes, the bill is defeated.
"We will stand by our amendments from the (upper) house," opposition environment spokesman Greg Hunt said.
"They stand to protect the people of the Goulburn and the Murray from having water taken away by the north-south pipeline."
Mr Hunt said the government had made the Senate "meaningless".
"From this moment forward (Prime Minister) Kevin Rudd owns the north-south pipeline," Mr Hunt said.
"He has given it a green light, he has overridden the Senate."
But Environment Minister Peter Garrett said the amendments could not stand.
"The government is not supportive of mechanisms that predetermine how water can be used, so long as the extraction of that water is within the sustainable diversion limit established under the basin plan," Mr Garrett said.
Liberal MPs from rural Victoria spoke passionately against the Melbourne pipeline.
Fran Bailey said the state government was stealing water for Melbourne without consulting anyone and the commonwealth was supporting the scheme because Labor's votes were in Melbourne.
Sharman Stone said Melbourne had alternatives and shouldn't take water from a drought-stressed system.
Dr Stone said the affected region produced cheap, high quality dairy products, fruit, vegetables and wine.
"It's robbing Peter to pay Paul," she said.
But the debate proved fruitless for the Liberals.
The government did accept one amendment: requiring a study be undertaken to determine the impact of mining on groundwater in the system before any licences are granted.
However, independent Tony Windsor said that amendment was a "cop-out" as it had been watered down too much.
