Australia faces the prospect of more asylum seekers dying at sea after Federal politicians failed to strike a deal that could stop the flow of boats.
But Julia Gillard will try to force Tony Abbott back to the negotiating table by asking former defence chief Angus Houston to lead a panel of eminent Australians to draw up a blueprint to tackle people-smugglers and to slow the number of asylum-seeker vessels coming to the country.
After narrowly getting its Malaysia Solution people-swap deal through the Lower House on Wednesday, the Senate last night killed the Bill 39-29 when the coalition and the Greens joined forces.
The Government sought to revive the plan after two overcrowded refugee boats sank far off WA within days, killing up to 100 people.
The Malaysia Solution, under which 800 asylum seekers from Australia would be exchanged for 4000 certified asylum seekers from Kuala Lumpur, was ruled unlawful by the High Court last year.
Mr Abbott said the public had every right to be angry that parliamentarians could not strike a deal on asylum seekers.
He said the Prime Minister's "pride and stubbornness" had prevented a solution being agreed.
Citing former prime minister John Howard's dictum to "get what you can from Parliament", Mr Abbott said Ms Gillard had failed Australians by not settling on common ground to reopen a detention centre on Nauru.
But Ms Gillard indicated she would expect Mr Abbott and the Opposition to support the Malaysia Solution if an eminent panel with the likes of Air Chief Marshal Houston supported it.
"Would the Leader of the Opposition say that's of no worth? That would seem to me to be a very extraordinary conclusion," Ms Gillard said.
The panel will be asked to report before Parliament sits again on August 14.
On the panel with Air Chief Marshal Houston will be Paris Aristotle, who has advised both the coalition and Labor on refugee issues.
A cross-party reference group of MPs will be set up to advise the panel.
WA Nationals' MP Tony Crook, an original member of the backbench ginger group that pressed for a bipartisan resolution to the problem, put himself forward for the reference group.
"I am very disappointed at the way this week finished," Mr Crook said. "There was a real opportunity for the Government to accept some reasonable Opposition amendments that would have helped saved lives.
"But if the Prime Minister is genuine, we already have a group established that can help bring an end to this diabolical problem."
The Greens said they could not countenance any plan that involved offshore processing but WA Liberal backbencher Judi Moylan said the Greens had told her they were open to the idea during intense negotiations on Wednesday.