The bill will now be sent back to a parliamentary commission in a major setback for Socialist Prime Minister Pedro Sanchez that highlights the fragility of his parliamentary support.
The bill was rejected by 179 votes to 171 in the 350-seat parliament where Sanchez's left-wing minority government is dependent on a patchwork of support to pass legislation.
The law will apply to those wanted by the justice system over the 2017 Catalan independence bid, first and foremost the exiled leader of the hardline separatist JxCat party, Carles Puigdemont.
He was Catalan regional leader in 2017 and fled to Belgium to avoid prosecution.
Although JxCat had demanded the law in exchange for its parliamentary support to secure Sanchez another term in office, it tipped the balance by voting against the bill on Tuesday after its last-minute amendments were rejected.
The move angered the government, with Justice Minister Felix Bolanos saying it was "incomprehensible" they voted against a bill they had agreed on, siding with the right wing parties that sought "to imprison and outlaw them".
JxCat wanted to amend the text to guarantee the amnesty would apply to anyone accused of "terrorism" or "treason" -- wording absent from the current bill -- over allegations raised in two separate legal probes into Puigdemont.
"This text is a good starting point... but it has holes that Spain's prejudiced justice system can use to leave the amnesty in tatters," JxCat lawmaker Miriam Nogueras told lawmakers in the debate.
Both investigating magistrates have been accused by the left of harbouring politically-motivated ulterior motives after announcing on Monday they would be extending their probes.
"We are not terrorists," said Nogueras, warning lawmakers "not to embarrass the Europeans by trivialising terrorism."
- 'Rolling out the red carpet' -
For many on the Spanish right, Puigdemont is seen as public enemy number one.
"This law... is a joke and its only purpose is to keep Sanchez in power," said right-wing opposition leader Alberto Nunez Feijoo ahead of the vote.
"Sanchez wanted to bring Puigdemont to justice and now they are rolling out the red carpet for him. He left Spain in the boot of a car and now he'll return in Sanchez's Falcon," he jeered, referring to the prime minister's private plane.
Even if the bill eventually passes, it will face numerous hurdles before becoming law, with Feijoo's Popular Party (PP) vowing to slow its passage through the Senate, where it holds an absolute majority.
The measure has also drawn fierce opposition from some members of the judiciary and is facing legal challenges that could jeopardise its future.
On Monday, a magistrate extended his probe into whether Puigdemont had sought Russian support for a Catalan state, citing evidence of "close personal relationships" between his inner circle and Russians diplomats and spies.
According to El Pais, the probe could end in treason charges against Puigdemont that would fall outside the amnesty law.
A second magistrate is looking into Democratic Tsunami, a secretive protest group that blockaded Barcelona airport after Spain jailed nine Catalan separatist leaders in late 2019 over the independence crisis.
In November, the magistrate said Puigdemont had a "leadership" role within Democratic Tsunami, indicating the charges he faces "could be classified... as terrorism".
Last week, the Socialists were forced to amend the bill to ensure it would apply to those accused of "terrorism" as long as it didn't involve "a serious violation of human rights".
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