After a lengthy debate, 28 lawmakers voted against the proposals, which sparked huge street protests in the southern Chinese city last year.
Eight others voted in favor.
However, in a confusing scene moments before the vote took place, most of the lawmakers from pro-establishment parties walked out of the legislature chamber and failed to cast any votes.
They later blamed it on miscommunication, explaining that they were waiting for a fellow lawmaker who was ill to return to the chamber and had asked for a 15 minute break.
The government needed at least 47 of the 70 lawmakers to vote in favor of the proposals.
The bill's defeat comes at the end of Hong Kong's most tumultuous year since Beijing took control in 1997 after a century and a half of British colonial rule. Tens of thousands of people took to the streets last year to protest the central government's election screening requirement.
For 11 weeks, activists camped out on major thoroughfares in three neighborhoods to demand greater electoral freedom but eventually left the streets after exhaustion set in and Hong Kong's unpopular leader, Leung Chun-ying, refused to offer any concessions.
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