Powers to issue licences for a new generation of casinos risk defeat this week, jeopardising the Government’s controversial plans to liberalise the gaming industry.

MPs and peers are to stage separate votes on Wednesday to decide whether to approve Manchester as the host city for the first supercasino.

A revolt by an alliance of Labour MPs from towns that lost out to Manchester and others who disapprove of a more liberal gaming policy means that the Government cannot take a victory for granted. A Commons motion expressing “surprise and regret” at the choice of Manchester has been signed by 83 Labour MPs. The odds of a defeat are higher in the Lords, where Conservative and Liberal Democrats peers are lining up with rebel Labour backbenchers to block the policy. One of two Lords amendments attacking the policy was tabled by the Labour peer Baroness Golding.

Her amendment, and another tabled by the Liberal Democrats, calls on the Government to set up a joint committee of MPs and peers to consider the process by which the decision to pick Manchester for the supercasino was taken.

The Commons and Lords will both hold parallel short debates followed by votes on the Gambling (Geographical Distribution of Casino Premises Licences) Order 2007.

The nature of the votes, however, means that neither MPs nor peers unhappy with the choice of Manchester will be able to amend the licensing powers to substitute another location. Instead they will have to throw out the entire order, which seeks to grant licensing powers not just to Manchester City Council but to 16 other authorities of locations chosen for smaller-sized casinos.

Such an outcome would be a serious embarrassment to the Government, whose plans to update and relax the restrictions on gaming have provoked outrage from religious groups and generated allegations of sleaze amid a huge lobbying campaign from the powerful gambling industry.

Tessa Jowell, the Culture Secretary, can argue that the decision to choose Manchester as the venue for the first supercasino was not hers but that of an independent panel. However, a Lords committee accused the panel last week of failing to give a high enough priority to preventing the harmful effects of gaming, which the panel admitted would be difficult to monitor in a city as large as Manchester.

There was no guarantee that such a casino could help to regenerate the surrounding area, as ministers insisted, the Lords’ Merits of Statutory Instruments Committee said.

The Opposition also risks accusations of opportunism: the Conservative Party initially welcomed the decision to choose Manchester on the advice of George Osborne, the MP for Tatton, Cheshire, and shadow minister for Manchester under a scheme to build Tory links with big cities.

Tory MPs were originally on a one-line whip to support the order, but late last week Mr Osborne was overruled and Conservative MPs were instead give a three-line whip instruction to vote against.

The Tories said that the report by the Lords committee had raised questions about the process by which the locations for the casinos were chosen. Hugo Swire, the Shadow Culture Secretary, asked for separate votes on Manchester and the remaining smaller casinos, but was refused.

David Lammy, a junior culture minister, played down the prospects of a defeat. “I have heard this debate about close votes before,” he told Sky News.