Politicians debating the Children And Young People (Scotland) Bill voted against an amendment that campaigners believed would protect or increase the assistance for kinship carers.
Senior members of the Kinship Care Alliance expressed their "disgust" at the decision and have promised not to give up the fight.
Dozens of campaigners and supporters gathered in protest outside the Scottish Parliament while the Bill was considered by MSPs.
They argue the Kinship Care Order, a new legal status for kinship placements contained in the new Bill, will reduce the number of children with looked after status, which reduces financial support.
Removing looked after status in favour of a Kinship Care Order, they argue, will remove the priority access to psychological support many of the children require.
They also fought for a minimum level of financial support provided by local authorities to cover the cost of basic childcare.
A petition bearing more than 1000 signatures supporting the amendment was presented to Scottish Education Minister Michael Russell.
He met supporters and gave his assurance the Kinship Alliance would be involved in developing the secondary legislation for the Kinship Care Order as part of the new Bill.
Anne Swartz, chairwoman of the Scottish Kinship Care Alliance, said they were disgusted with the outcome of the debate but would now work with Mr Russell.
She said: "My gut reaction is sheer disgust. This isn't the end of the line but it means a lot more hard work for kinship carers to prove our case.
"Without the amendments we proposed it will make life even more challenging for kinship carers if we can't get the secondary legislation to where we think it should be.
"The kinship carers have been doing this for nearly 10 years to try and get the situation for kinship carers to a much more acceptable level."
MSPs also cleared the way for controversial plans to appoint a specific guardian for every child aged up to 18 to be approved, after rejecting a last-ditch attempt to limit the impact of the proposals.
A move to limit the named person policy to under 16s was defeated by 69 votes to 51.
The Bill also includes measures that will increase the amount of free childcare for vulnerable two to four-year-olds to 600 hours a year.
And it will strengthen the law on school closures, particularly in rural areas.