The 92-3 vote comes as the House planned to approve separate legislation Tuesday that requires President Bush to give Congress a plan for eventual troop withdrawals.
The developments underscored the difficulty facing Democrats in the Iraq debate: They lack the votes to pass legislation ordering troops home and are divided on whether to cut money for combat, despite a mandate by supporters to end the war.
Hoping the political landscape changes in coming months, Democratic leaders say they will renew their fight when Congress considers the money Bush wants in war funding.
While the Senate policy bill authorizes the money to be spent, it does not guarantee it; Bush will have to wait until Congress passes a separate appropriations bill before war funds are transferred to military coffers.
"I think that's where you're going to see the next dogfight," said Senate Majority Leader Harry Reid, D-Nev., of the upcoming war spending bill.
Democrats say their options include directing that the money be spent on bringing troops home instead of combat; setting a date when money for the war is cut off, and identifying a goal to end the war to try to pressure Bush to bring troops home.
Similar attempts have been made but fell short of the 60 votes needed to overcome procedural hurdles in the Senate.
"Many of us have reached a breaking point on this," said Senate Majority Whip Dick Durbin, D-Ill. "I've done this for too many years. I've waited for the president to start bringing this war to an end. I'm not going to sign up for this any longer."
In the House, Democrats are pushing for a bill that would require the administration to report to Congress in 60 days and every 90 days thereafter on the status of its redeployment plans in Iraq.
The bill, sponsored by Democrats John Tanner of Tennessee and Neil Abercrombie of Hawaii, was initially cast aside as too mild by Democratic leaders focused on tougher proposals ordering troops home this fall.
But after Democrats were unable to peel off Republican support, the Iraq debate stalled and some four dozen rank-and-file Democrats demanded a vote on the Abercrombie-Tanner bill.
"This will be the first time since the war in Iraq began that we are working together as a Congress instead of one party or another to be a constructive voice in the civilian management of operations in Iraq," Tanner said in a statement e-mailed to the Associated Press.
In February, Bush requested more than $140 billion for the war, and is expected to ask for another $42 billion to cover costs in the 2008 budget year, which began Monday. The Senate's defense policy bill authorizes Bush's initial request, plus an additional $23 billion for the purchase of bomb-resistent vehicles.
In addition to war money, the Senate's defense policy bill authorizes more than a half trillion dollars in annual military programs, including such big-ticket items as $10.1 billion for missile defense.
Republicans predict the bill is on track to be vetoed by President Bush because it includes hate-crimes legislation by Sen. Edward Kennedy, D-Mass. The White House has said Kennedy's proposal, which would let federal law enforcement help states prosecute attacks on gays, is unnecessary.
The House passed its version of the defense authorization bill in May by a 397-27 vote. That $646 billion measure would trim hundreds of millions of dollars from some weapons modernization programs and use the money instead to aid troops in combat.
The House bill has drawn a veto threat from the White House because of provisions insisting the military rely heavily on American-made products and proposed changes to the Pentagon's personnel policies.