The way is clear for a Mid Sussex hospital to gain independence from Whitehall after protesting peers in the House of Lords finally threw in the towel.

Queen Victoria Hospital, in East Grinstead, is back on course to win foundation status - to be run by the local community and with the power to borrow money - next April.

But the Health and Social Care Bill, which creates foundation hospitals, only cleared Parliament after a day of drama which forced MPs to sit until 2.15am yesterday.

Opposition peers caved in after the government threatened to force MPs to return next Monday and Tuesday, extending the session until the eve of the Queen's Speech.

And Health Secretary John Reid was forced to agree to a 12-month review which will prevent any more hospitals applying for foundation status until late 2005.

Tim Yeo, the Tory health spokesman, said the government only won after threatening to scupper the rest of the Bill, which also contains a new GP contract and extra cash for dentistry.

He said: "They only won in the Commons by deploying bullyboy tactics, flying ministers from Australia and relying on Scottish Labour MPs, who will not even feel the effect of this legislation."

But Mr Reid said: "Foundation trust status will enable hospitals to respond more quickly to what local NHS patients want, by entrusting their ownership to local communities.

"It will also liberate NHS staff from Whitehall control, so they can deliver improved services to NHS patients."

At one stage, the government's majority of 160 was slashed to just 17, although it bounced back to 41 when MPs voted a second time early yesterday.

Sixty-two Labour backbenchers, including Brighton Kemp Town's Des Turner, rebelled because they fear the measure will create a "two-tier" health service, with less successful hospitals left behind.