The bill is supported by a coalition of parties whose candidate was narrowly defeated in July's presidential elections.
Direct elections for mayors, regents and governors began in 2005 as part of Indonesia's democratic transition after 1998 fall of Suharto dictatorship.
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The president will continue to be directly elected.
"It is hard not to view this bill as a blunt political manoeuvre to return electoral authority from the people to party leadership in the face of electoral defeat in the presidential election," Andrew Thornley, an Indonesian election expert at the Asia Foundation, wrote in a blog post yesterday.
An online petition rejecting the bill has been signed by more than 54,000 people, while several surveys showed that majority of Indonesians support direct elections.
The vote was held after a walkout of lawmakers from the ruling Democratic Party, who supported direct elections.
The vote represents an early defeat for President-elect Joko Widodo, whose party had voted against any changes in the electoral process.
The coalition of losing candidate Prabowo Subianto has a majority of seats in the national parliament and has vowed to disrupt Widodo's presidency.
Subianto's supporters had argued that direct elections were expensive and had produced corrupt and inefficient leaders.
Civil society activists and progressive voices had disputed this, saying the real reason that the opposition are seeking to scrap direct elections is because indirect polls give them greater power to dictate the outcome.
Widodo and several other previously little know politicians have risen to prominence via direct regional elections, loosening the grip of the major political parties.
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