The Liberal Democrats have won a key by-election in Eastleigh, where the Tories were pushed into third place by UKIP.
Local councillor Mike Thornton held the seat vacated by disgraced Cabinet minister Chris Huhne despite a torrid week for his party.
At 1,771, the Lib Dem majority was more than half that achieved by Mr Huhne in 2010 but the victory will be seen as a major boost.
Nick Clegg promptly claimed that the party was "on track for 2015".
For David Cameron, the result is a severe blow with the Conservatives' third place coming despite major campaigning by top Tories.
UKIP's strong showing will increase tensions on the Tory backbenches, and fuel fears about a general election drubbing in 2015.
There will be concern that Mr Cameron's pledge to hold a referendum on EU membership if the Tories stay in power has not curbed UKIP's rise.
The eurosceptic party's candidate Diane James won 11,571 votes - an increase of almost 10,000 on the party's showing in 2010.
Mr Thornton won with 13,342, with Tory Maria Hutchings in third on 10,559.
Labour's John O'Farrell polled 4,088, more than 1,000 down on 2010, in what was also a disappointing performance for the Opposition.
In his victory speech, Mr Thornton said the result proved those who had "written off" the Lib Dems were wrong.
"Those who say the Liberal Democrats won't win again, those who are so keen to do us down, that the Liberal Democrats can do it - we have done it and we will do it again," he said.
Ms James hailed her second place as "a humongous political shock" that represented a "seismic shift" in British politics.
And Mrs Hutchings appeared to be fighting back tears as she thanked opponents for a "clean campaign".
Delighted UKIP leader Nick Farage hailed his party's "massive surge" and blamed the Tory's bad showing on Mr Cameron.
"The Conservatives failed here because traditional Tory voters look at Cameron and they ask themselves 'Is he a Conservative?' and they conclude 'No, he's not'," he said.
"He's talking about gay marriage, wind turbines, unlimited immigration from India. He wants Turkey to join the European Union. The Conservatives' problems are not because of UKIP, it's because of their leader."
He added: "People will say it was a protest vote but who we attracted here were non-voters who had not voted for 20 years - they are not protest votes."
Eastleigh is on a Tory target list of 20 Lib Dem-held seats considered crucial to win if Mr Cameron is to win outright at the next general election.
Senior Tory backbencher David Davis had already warned the Prime Minister that third place in the seat would represent a "crisis" for the party.
Conservative Party chairman Grant Shapps tried to play down the significance of the result, saying: "Governments in mid-term regardless get a drubbing. Let's wait until the general election."
Education Secretary Michael Gove said voters had turned to UKIP because they wanted to "register a sense of hurt" but insisted they still backed Mr Cameron over the economy.
Calculations by the Press Association suggest Labour would have a majority of 60 if the vote share changes were repeated nationally at a general election.
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