Labour has won the Oldham East and Saddleworth by-election with a majority of more than 3,500.
Debbie Abrahams won 14,718 votes in the marginal seat, 3,558 more than closest rival, Lib Dem Elwyn Watkins.
In May's election, Labour beat the Lib Dems to the seat by just 103 votes.
The Conservatives' vote fell by more than 7,000 as they came third, with Kashif Ali securing just 4,481 votes.
Labour said the result was a "wake-up call" for the coalition government.
In her acceptance speech, Abrahams said: "The voters have spoken for the country. They have sent a clear message for those watching in Downing Street.
"Mr Cameron, Mr Clegg, you may be watching, but now you have to listen."
Speaking outside his home this morning Nick Clegg said he was pleased with his party's performance in "unusual circumstances".
"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."
Conservative party chairman Baroness Warsi rejected claims the Tories had deliberately held back in the contest in order to boost the chances of the Lib Dems.
"If you look at by-elections over the last three decades, you will see that the party that starts in third place invariably has its vote there squeezed," she said.
"Of course our vote has been squeezed. We started off in third place and ended in third place."
Shadow foreign secretary Yvette Cooper said the result was a sign that voters had turned away from both coalition parties.
Speaking to Radio 4's Today programme this morning, she said: "We are pleased with the result and it is a big change from the general election, a big increase in the majority.
"We saw a swing from both the Conservatives and the Liberal Democrats, so I do think it does reflect the anger that there is among voters about some of the things the government is doing."
The by-election was called after a special court found Labour MP Phil Woolas had made knowingly false statements about his Lib Dem opponent in the general election and stripped him of his seat.
Official turnout was considerably less than in the general election, with 48 per cent of registered voters casting their ballots compared with 61 per cent in May.


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