The compromise, however, excludes other amendments in order to streamline passage of the legislation that funds the military.
"This is not the best way to proceed," said Sen. Carl Levin, D-Mich., chairman of the Armed Services Committee, "but this is the only practical way to get a defense bill this year."
Levin said that without a defense bill, the Pentagon would lose its authority to spend on certain programs on Dec. 31.
Senate and House Republicans agreed to the compromise, noting the need for passage of a bill that extends combat pay and includes sanctions on Iran.
The Senate debated the Gillibrand amendment last month, but voting on the measure was shelved by partisan bickering and procedural maneuvers that blocked the defense bill from advancing.
The compromise reached Monday was an attempt to move past the political dysfunction and quickly approve the legislation.
The House adjourns for the year on Friday, leaving no time for both chambers to address the amendment by Gillibrand, D-N.Y., or a competing proposal by Sen. Claire McCaskill, D-Mo., that would impose strict guidelines on how commanders deal with sexual assault complaints, but would still leave them with the decision of whether to prosecute.
A statement late Monday by Gillibrand's spokesman declared that "regardless of what happens, the senator will not go away, she will keep fighting to protect our brave men and women in uniform and to strengthen our military."
Senate consideration of her stand-alone legislation later this year or in 2014 would confront the filibuster hurdle, which means that she would need the support of 60 members of the 100-member Senate to vote to squash the filibuster. It would also need House approval to be sent to the president to be signed into law.
Gillibrand has claimed 53 senators have voiced public support for her measure. Her supporters include liberals like Sen. Barbara Boxer, D-Calif., and Sen. Richard Blumenthal, D-Conn., and tea party conservatives like Sen. Ted Cruz, R-Texas, and Sen. Rand Paul, R-Ky.
Her amendment was fiercely opposed by top Pentagon officials, Levin, McCaskill and other members of the Senate Armed Service Committee. Their argument was that commanders needed to make prosecution decisions in order to maintain discipline in their units.
Nonetheless, the 2014 defense authorization measure will make more than a dozen changes in procedures and policies in how the military deals with sexual assault cases.
It would create a citizens' review of decisions not to prosecute, mandate a dishonorable discharge for those convicted of sexual assault, and limit the ability of commanders to reverse guilty verdicts in court martial cases. The Gillibrand and McCaskill amendments would have added to those changes.
The Senate focus on military sexual assault cases comes after a series of scandals across the armed services that have marred the military justice system. Assaults on recruits, subordinates and students at service academies prompted a year of congressional hearings.
Widespread sexual abuse of enlisted trainees at Joint Base San Antonio-Lackland led to charges filed against dozens of Air Force instructors accused of misconduct.
Victims have complained that they have been targeted for reprisals for reporting the crimes. Investigative reports this year by the San Antonio Express-News documented repeated cases of retaliation against assault victims, failure to provide legal and medical support for them and dismissal from the service after they reported abuse.
The Pentagon estimates there were 26,000 sexual assaults in the military last year, but only about 300 prosecutions.