MPs have rejected proposals that would lead to a radical reform of their expenses system thought necessary to restore trust in democracy and clean up Westminster's "snouts in the trough" image following a series of financial scandals.

By a narrow majority of 28 in a free vote, MPs agreed to retain the controversial Additional Costs Allowance (ACA) that funds second homes in London, with the proviso of having their spending scrutinised once every parliamentary term by internal auditors.

The unexpected move means the infamous "John Lewis list" of approved prices for furnishing claims that has allowed some MPs to claim expenses of up to £10,000 for a new kitchen and £2000 for furniture for their second homes will continue. The ACA allows MPs to claim up to £24,006 a year against mortgages, rent or hotel bills leading to accusations of profiteering on property investments.

The vote drew immediate condemnation from within Westminster and beyond. Highland LibDem MP Danny Alexander said those who voted to block reform should be utterly ashamed. "These were self-serving and cynical votes. By keeping their snouts in the trough those mainly Labour MPs, along with some Tories, have shown total contempt for public demand for a more open and accountable system."

Senior LibDem MP Nick Harvey earlier warned that rejecting the reforms in defiance of public opinion would be "utterly catastrophic" for the image of parliamentarians and Matthew Elliott, of the Tax Payers' Alliance, said MPs had missed a crucial opportunity to restore faith in Westminster.

He said: "By clinging on to the plasma screen TVs and luxury kitchens allowed by the John Lewis list they have shown astonishing arrogance and disregard for people's concerns."

The Conservatives accused the government of making a "shabby deal" with its backbenchers, allowing them to vote to retain their expenses in return for accepting a below inflation salary increase. Of the 172 votes to retain the John Lewis list, 146 were Labour. They included some cabinet ministers such as Home Secretary Jacqui Smith, Culture Secretary Andy Burnham and Housing Minister Caroline Flint.

A "root and branch" review of allowances, unveiled last month by a committee chaired by Speaker Michael Martin, had recommended an immediate end to the furnishings allowance, a full external audit of expenses, all claims to be receipted and limits on overnight and daily allowances.

The proposals to end the "gentleman's club" system of a MP's signature being enough to authenticate a claim, followed a series of financial scandals involving MPs allowances and drew heavily on the experience of the Scottish parliament where MSPs expenses are regularly published. Following a Freedom of Information campaign all MPs expenses are due to be published regularly from this Autumn.

But in the unwhipped vote in the Commons yesterday MPs threw out the reform proposals, accepting only one recommendation for a new office allowances, a move that could increase the annual bill for constituency offices from £2.8m to potentially £6m.

The decision diminished an earlier vote in which MPs bowed to the Prime Minister's advice to show restraint by awarding themselves a 2.25% rise for the next year. The decision to accept a below inflation rise was taken without a vote after a backbench move to raise salaries by up to 2.3% this year and about 4.7% next year was rejected by 196 votes to 155, a majority of 41.

An amendment to boost salaries with £650 a year "catch-up" payments over the next three years was also rejected by a 101 vote majority.

It will be the last time MPs debate and vote on their own pay rise after they agreed to link future increases to those given to other public sector workers like doctors and teachers.