Jacqui Smith, the home secretary, said the new version will require a court order for every extended detention sought for a terrorism suspect, and for parliament's endorsement in each case.
The government initiated the proposed detention period, extended from the present 28 days, saying it was needed to fight the complex international "terrorist threats" facing the country.
In June the lower House of Commons endorsed the 42-day plan by a slim margin of nine votes.
Chris Huhne, an opposition legislator from the Liberal Democrats, said the House of Lords vote was "a crushing defeat" for the government, and that it had "completely lost" the argument over the best way to combat terrorism.
The issue has divided Britons in recent years amid raised fears of attacks.
At the time of the September 11, 2001 attacks in the US, there was a two-day limit on detention without charge, which could be increased to seven days with court permission.
Tony Blair, the former British prime minister, and his successor, Gordon Brown, have maintained that extra time is needed to build cases against terrorism suspects because of their extensive contacts overseas and their use of multiple computers.
Andy Hayman, a former police officer who led London's counter-terrorism operations until last year, has said that an extension detention will help police to tackle increasingly complex terrorism cases.
There have been a number of thwarted or failed attacks in Britain since the London suicide bomb attacks that killed 52 commuters in July 2005.
Two men are currently on trial for allegedly trying to ram a flaming jeep into Glasgow airport in June 2007 after failing to detonate car bombs outside a London nightclub and bus stop.
Opponents of the 42-day measure note that there have not been any cases when 28 days were needed to evaluate a terrorism suspect.
A study by the British rights group Liberty found that the 28-day limit in Britain is the longest detention period in 15 Western democracies, Jen Corlew, a spokeswoman, said.
A number of prominent politicians, writers and the Council of Europe have criticised the controversial proposal, saying it was a threat to civil liberties.
The council, Europe's top human rights watchdog, said the proposal would have put in peril a terror suspect's right to a fair trial.