Pro-democracy lawmakers rejected a proposed bill backed by Beijing, which would allow residents to vote for a leader in 2017, only if the candidate was picked by the Chinese government.
Out of the total of 70 lawmakers, 28 voted against the electoral reforms bill, with only 37 candidates casting their ballot. The remaining legislators, most of whom supported Beijing, walked out without voting after intense arguments.
The China-backed bill needed at least 47 votes in favour for it to be passed.
Last year, the southern Chinese city came to a virtual standstill after protestors took to the streets demanding that the bill be scrapped.
It was billed as a "fake democracy" offer and leaders had claimed that an electoral reforms package defeats the purpose of true democracy, since the candidates for the top post would have to be vetted by the 1,200-member pro-China committee.
Hong Kong, which is a former British colony, is a semi-autonomous region administered by China. In September 2014, thousands of pro-democracy protestors had taken to the streets and staged massive demonstrations for several weeks demanding that Beijing not pick a leader for the citizens to vote.
The protests were led by students and the Occupy Movement, but they were evicted by the government. The incident was one of the biggest political crises that China faced in recent years.