Robert Gates, the US defence secretary, had warned on Thursday that if the money was not approved funding for the war would run out by February.
Harry Reid, the Democratic senate majority leader, had warned earlier in the week that if the bill failed, Bush could expect no more money for the war this year.
The Pentagon now looks set to be forced to dip into its operating budget to pay for the war.
Gates says the move would spark layoffs of thousands of civilian employees and defence contractors.
Friday’s vote marked the latest victory by Bush and his Republican allies over Democratic attempts to change war strategy.
The emergency budget outlined in the bill would have provided only four months of funding for the war, a $50bn segment of the $196bn requested by Bush.
Tony Fratto, a White House spokesman, said: “I think Congress should send this money, allow these troops to get the equipment they need. There’s no reason why they should not get the money.”
The bill sought the withdrawal of troops to begin within 30 days and set a goal of December 15, 2008, for the pullback of most combat troops to be completed.
The measure also sought to outlaw the use of torture by US government agencies.
Republicans put forward what they call a “clean” funding bill, stripped of troop withdrawal deadlines, which was also defeated.
Reid said: “The president and his enablers in congress are so afraid of being held accountable for this disastrous war policy that they’d rather leave our men and women in uniform empty-handed than work to change course in Iraq.”
Republicans, however, predicted that Democrats would be forced to return to the funding issue in December.
Jon Kyl, a Republican senator, said: “We cannot continue to condition funding for the troops on the Democratic proposals on withdrawal dates that all of our military leaders have said are not only unrealistic, but would do harm to the ability of our troops to carry out their mission.”
Bush, who has fought attempts by the Democrats to limit his strategy on the war, had threatened to veto the measure in the unlikely event it reached his desk.
Source: News Agencies