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Chile's Congress on Thursday rejected a government proposal to revamp mining royalties to help pay for reconstruction after a massive quake, in a major political blow for President Sebastian Pinera.

The mining royalty change proposed by the government aimed to raise up to $1 billion out of a wider $8.4 billion package to fund rebuilding after the Feb. 27 disaster, which killed over 500 people and ravaged industries in south-central Chile.

Pinera will likely be forced to tap copper boom savings held abroad or issue more debt to plug the financing gap, which the government has warned could pressure the peso currency.

"The alternative we have now is not the best for us. The preferred path would have been to tax big mining companies that would have contributed $1 billion for reconstruction," government spokeswoman Ena Von Baer told reporters after the reform was struck down.

She did not say whether the government planned to insist on a new royalty scheme by introducing new legislation.

The political blow also stoked worries about mining regulations in the world's top copper producer as opposition lawmakers considered the already controversial reforms insufficient.

Congress has approved all the tax changes proposed in the bill except for the mining royalty increase even after the government made concessions to seek approval.

The government wanted to raise royalties by replacing the current fixed rate for a sliding one that varies depending on the companies' margins in exchange for extending a tax freeze for eight years.