Hundreds protested outside Parliament on Tuesday afternoon as the House of Commons debated the issue.
They said legislation was badly needed as thousands suffer abuse and prejudice because they are considered low caste.
But ministers said there were concerns in the Hindu and Sikh communities that legislation could increase the stigma.
MPs voted against adding caste discrimination to the Equality Act by 307 to 243, a majority 64.
Meena Varma of the Dalit Solidarity Network said: "I am very disappointed. But we'll keep going until we get this legislation."
Campaigners say current laws offer no protection from discrimination.
They say caste divides society unfairly, with those at the bottom - often called untouchables - expected to do dirty, poorly paid work.
They complain they are also expected to - and forced to - look up to and respect higher castes.