With the 230-vote margin far more than markets were anticipating, the pound gained, particularly against the euro, and the domestically focused FTSE 250 stock index edged higher on some expectations that the scale of defeat might force lawmakers to pursue other options.
Bank of England Governor Mark Carney said sterling's rise after May's Brexit plan was defeated suggested investors felt the risk of a no-deal Brexit had diminished, or that the process would be extended.
"The expectation that May is now set to seek cross-party backing for a new deal is also reassuring for investors since this suggests an effort will be made to find a compromise with broader appeal," Rabobank strategists said in a note.
In Wednesday trade, the pound strengthened to 88.67 pence per euro - its strongest level since late November. Against the dollar, the pound was broadly flat at $1.2858 after seesawing in a broad 1.5 percent trading range overnight.
May will face a vote of no confidence on Wednesday evening though many analysts have said she will survive the vote.
Expectations that Britain may be slowly inching towards a softer Brexit is also playing up in the currency derivative markets.
Implied volatility on the pound for three months edged back towards November lows, indicating markets are slightly more optimistic about the pound in the short term.
"Looking forward, we still anticipate a decent looking Brexit bill will be passed and any concessions from the prime minister could result in a ‘softer’ Brexit," said Hamish Muress, currency analyst at OFX.
(Reporting by Dhara Ranasinghe, Saikat Chatterjee and Maiya Keidan; Editing by Alison Williams)