Ed Miliband has said Labour’s by-election victory is the “first step in a long journey” for his party.
The Labour leader said the party’s win in Oldham East and Saddleworth, with a majority of 3,558 also sent a “clear message” to the government.
Lib Dem Elwyn Watkins came second but fractionally increased the party’s vote share on the 2010 result.
But the Tories saw their vote share halved – they denied “soft pedalling” to help their coalition partners.
The Greater Manchester by-election was called after a special court found ex-Labour minister Phil Woolas made false statements about Mr Watkins in May’s general election, in which Labour retained the seat by just 103 votes over the Lib Dems.
The ruling invalidated the result and resulted in Mr Woolas being barred from politics for three years.
But in Thursday’s by-election Labour secured a much clearer victory – finishing 3,558 votes ahead of the Lib Dems with 14,718 votes. The party’s share of the vote increased from 31.9% to 42%.
Although the Lib Dems failed to snatch the seat, their share of the vote actually increased slightly, from 31.6% at the general election to 31.9%.
They polled 11,160 votes, with the Conservatives getting 4,481 (12.8% share), UKIP 2,029 (5.8%) and the BNP 1,560 (4.5%).
The Tories saw their vote collapse, amid accusations that they had fought a deliberately lacklustre campaign in an attempt to give their coalition partners a clear run.
With Labour extending its majority from just 103 at the general election last May to 3,558, Mr Miliband said the result showed that voters had rejected coalition policies.
“This is a first step in a long journey for Labour but, more importantly, I hope the Government will listen to what they’ve said about these key issues,” he said as he left his north London home.
“They said to the Government: think again on VAT, think again on the trebling of tuition fees, think again on the police cuts that are going to affect their communities.
“And I think part of what it should be about in this country is listening to the voters. I think that’s what David Cameron and Nick Clegg should do.”
The result came as an important boost for the Labour leader, who has been under fire for failing to make a stronger impact since taking the helm of the party last September.
There was relief also among the Lib Dems that the result was not worse, following the dramatic slide in their support since they joined the Conservatives in government.
Leaving his London home this morning, Deputy Prime Minister Nick Clegg insisted it had been a “strong” showing by his party at what was a “challenging time” for the coalition.
“I think the strong result in this by-election for the Liberal Democrats shows that whether we are in government or in opposition, we remain a strong, united independent party whose values continue to attract support,” he said.
“I think it was a strong result, given the circumstances in which the by-election was fought. It was a by-election held in unusual circumstances at a time when the Government is taking difficult decisions, of which we are a part.
“It was clear that it was going to be, and turned out to be, a fairly close race between us and Labour.”
Mr Clegg was meeting senior Lib Dem colleagues this morning to discuss the election result, although aides denied it was a crisis meeting.
The Lib Dems, who saw their share of the vote increase slightly since the election, appear to have benefited from tactical voting by Conservative supporters trying to keep Labour out.
Tory Party chairman Baroness Warsi denied that the Conservatives had run a deliberately low-key campaign to help Mr Clegg at a time when he is under intense pressure.
“I led this campaign and every resource was put into it,” she told BBC Radio 4′s Today programme. “We never attacked the Liberal Democrat Party but we never campaigned for them either.”
She acknowledged that there had been criticisms from some on the Tory right over the way that the campaign had been run, but rejected their complaints.
“As far as the right wing of our party are concerned, I would say this to them: We had many, many MPs turning up. We had some who made much comment about the fact that we weren’t fighting a strong enough campaign but interestingly didn’t turn up to campaign,” she said.
“I would say to those who are critical, unless you were here, unless you were out delivering and unless you were out knocking on doors, you really don’t have a right to complain about us not being vigorous enough.”
Earlier, shadow education secretary Andy Burnham, who oversaw the Labour campaign, contrasted Mr Miliband’s decision to visit the constituency three times with Chancellor George Osborne’s choice of a festive holiday.
“While Ed was in the hills in Saddleworth, Tory ministers were on the skiing slopes in Klosters,” he said.
The by-election was called after the Lib Dem candidate Elwyn Watkins successfully challenged last year’s result in a special election court which ruled that the Labour victor, Phil Woolas, had made false statements about him.
But despite expectations of a local backlash against Labour, Mr Watkins polled only 11,160 votes to the Labour candidate Debbie Abrahams’ 14,718. Tory Kashif Ali came a distant third with 4,481.
Mr Cameron insisted that the Tories had fought a “good campaign” in the by-election.
“I was one of the first Prime Ministers for many, many years to campaign personally in an English by-election. I enjoyed doing that. I am proud of the campaign we fought,” he told reporters on a visit to Newcastle.
“Of course, we started in third place and we ended in third place. That is often the way with by-elections. This was not an unexpected result.”
OLDHAM EAST AND SADDLEWORTH
Debbie Abrahams (Lab) 14,718 (42.14%, +10.27%)
Elwyn Watkins (LD) 11,160 (31.95%, +0.32%)
Kashif Ali (C) 4,481 (12.83%, -13.62%)
Paul Nuttall (UKIP) 2,029 (5.81%, +1.95%)
Derek Adams (BNP) 1,560 (4.47%, -1.25%)
Peter Allen (Green) 530 (1.52%)
The Flying Brick (Loony) 145 (0.42%)
Stephen Morris (Eng Dem) 144 (0.41%)
Loz Kaye (Pirate) 96 (0.27%)
David Bishop (Bus-Pass Elvis) 67 (0.19%)
Lab maj 3,558 (10.19%)
4.98% swing LD to Lab
Electorate 72,788; Turnout 34,930 (47.99%, -13.19%)