"I urge the Senate to get back to work and put the interests of the country ahead of party"
President Barack Obama
But in the vote on Monday evening Republicans united to block debate on the bill, with the final vote 57 in favour to 41 against.
Two Democrats voted with the Republicans although one of those votes, from Harry Reid, the Democrat majority leader, was for procedural reasons.
Reid had initially voted in favour of the bill, but switched his vote in a move that allows him to bring up the bill again at a moment's notice.
Speaking after Monday's vote Reid said he expected to see further votes "this week" on the legislation.
"We remain open to working with our Republican colleagues, but we will not tolerate efforts to slow-walk this process or water down this reform because it is too important to middle-class families," he said in a statement.
The rejection does not mean the death of the reforms, but does give Republicans leverage to extract more concessions on the bill.
'Tighten the screws'
Mitch McConnell, the Republican senate minority leader, denied that his party was siding with big banks, saying that Republicans want to "tighten the screws on Wall Street" but would not be "rushed" into the legislation.
The main aim of the reform bill is to tighten government oversight of financial firms, with a view to preventing another Wall Street meltdown like the one in 2008 that triggered the recession.
The proposed consumer protection agency would also help fight loan and mortgage abuse, and it would give the government new powers to seize and dismantle huge financial firms on the brink of failure if their collapse threatens the economy.
That is opposed by many Republicans, who say it leaves the door open to more big government bail-outs in the future.
Instead Republicans want the legislation to increase the amount of cash financial institutions must keep on hand to cover any investment losses.
With continued US public anger at big banks blamed for the 2008 global economic meltdown, and facing November mid-term elections, both Democrats and Republicans say they want tough new rules to govern Wall Street.
But Republicans say they do not want to go ahead with open debate in the senate until year-old closed-door talks on a compromise bill have run their course.
The main disagreement centres on measures to address troubled financial institutions without resorting to costly taxpayer-funded bail-outs.
|Obama has said the reforms are essential to prevent a repeat of the 2008 crisis [EPA]
Republican leaders have argued that a proposed $50bn fund as part of the legislation to wind down failing firms would lead to endless bail-outs - a claim the Obama administration has repeatedly denied.
"Some of these senators may believe that this obstruction is a good political strategy, and others may see delay as an opportunity to take this debate behind closed doors, where financial industry lobbyists can water down reform or kill it altogether," Obama said in a statement after Monday's vote.
He said the American people could not afford to see the reforms fail, saying that a lack of consumer protections and a lack of accountability on Wall Street had nearly brought the US economy "to its knees."
"The reform that both parties have been working on for a year would prevent a crisis like this from happening again, and I urge the senate to get back to work and put the interests of the country ahead of party."