The Lords voted the amendment down by 148 votes to 111.
It would also have seen all asylum seekers, ruled by a High Court judge to be victims of genocide, to be presumed eligible to start a new life in Britain.
Several Christian peers among others backed the amendment which, had it passed, would have put significantly more pressure on the UK government to formally declare Islamic State's actions as genocide.
A successful vote would have prompted MPs in the House of Commons to debate the amendment as well.
The government asked Conservative peers to block the amendment, and many Labour peers also ended up following suit.
British officials have said that it is for other international judicial bodies to declare Islamic State's actions as genocide, and not an individual nation state like the UK.
Lord David Alton, a Christian peer who has led calls for Britain to recognise IS' treatment of minorities as genocide, said in a statement: "It was disappointing that both the Government and Opposition declined to respond to the powerful calls made from around the Chamber.
"This was a day when Britain neither salved its conscience or offered practical help but chose to look the other way.
"When historians come to consider the lamentable failure of both parliament and government to speak and act they will surely conclude that we failed to recognise the crime above all crimes.
The Christian peer has already tabled another motion in the House of Lords today on the issue.
A Home Office spokesperson said: "The proposed amendment to the Immigration Bill is unnecessary as the existing rules agreed by Parliament already set out the criteria for refugee status, which encompass those threatened by genocide.
"The amendment also creates potential security loopholes in the system because presumption of qualification for refugee status may make it more difficult to identify and exclude those who are a threat to our communities.
"Parliament has entrusted trained and experienced asylum caseworkers to make decisions on claims based on up to date country of origin information and policy guidance. This should continue to be the process."