Lib Dems' stunning victory sparks new calls for Blair to quit now

Hours after suffering a humiliating blow to his authority with a shocking defeat in the Dunfermline and West Fife by-election, Tony Blair called yesterday for the Labour Party to hold its nerve and keep to the reforming agenda on schools and anti-terror laws.

"This is a moment to stand firm, to have faith that the changes we are making will in time work to our country's advantage and therefore to ours," he said.

The Liberal Democrat victory in Gordon Brown's backyard - embarrassingly for the Chancellor, the seat where he lives - lifted Liberal Democrat spirits after a demoralising start to their scandal-hit leadership contest. Willie Rennie overturned a Labour majority of more than 11,000 to push Labour into second place and the SNP to third. Mr Rennie received 12,391 votes to Labour's 10,591, a majority of 1,800.

Some Labour MPs were calling openly last night for Mr Blair to quit before his leadership causes more damage to the party. But the Prime Minister was unapologetic and in a keynote speech to Labour's spring conference in Blackpool did not even mention the Liberal Democrats or their win.

Mr Blair pleaded with his party not to inflict more damage on his government next week with defeats in the Commons on his controversial Bills on ID cards and anti-terror measures, and won a standing ovation from the largely subdued audience. "These votes are not just crucial in themselves", he said. "They will send a strong signal, one way or another, of our intent on this issue."

Referring to the protests over the offensive cartoons depicting the Prophet Mohamed last week, Mr Blair added: "After the events of last weekend, I want to make one thing clear. I understand the offence the cartoons have caused. We all regret that.

"But nothing, I repeat nothing, can justify the violent retribution visited on innocent people or embassies round the world or the glorifying of acts of terrorism including those of 7/7 here in Britain."

He said plans for identity cards were "not only sensible but vital for Britain's security in the 21st century" and that to back off from proposals to outlaw the glorification of terrorism would be a serious mistake.

Mr Brown was absent from the ruins of Labour's by-election campaign, attending a G8 summit for finance ministers in Moscow. He will fly back to Britain in the early hours tomorrow for the Sunday AM programme on BBC television, but was not planning a speech at Blackpool.

Party officials put a brave face on the loss, stressing that by-election defeats at the hands of the Liberal Democrats in the past did nothing to stop Labour winning landslide victories in the subsequent general elections. One crumb of comfort for Labour was that the protest vote did not transfer to the Tories. However, in a seat where a couple of generations ago they voted Communist in Fife, the Tories were never likely to win.

The danger for Labour is that the protest vote will turn into abstentions elsewhere. Ministers are privately bracing themselves for humiliating defeats in the May local elections, which will spark demands for a change of leadership.

Labour's national executive committee was warned last week by the party's own polling that "intention to vote" was worryingly low among Labour voters. Labour campaigners in Scotland estimated 6,000 Labour voters refused to vote in the by-election.

John McDonnell MP, chair of a left-wing Labour group, accused Mr Blair and Mr Brown of "not living in the real world". He said: "Dunfermline teaches us that traditional Labour voters are deserting the party in their droves because they've had enough of this legacy agenda.

"When people can't distinguish Labour from the Tories and Blair from Cameron they will vote for an alternative. Labour voters are demonstrating that they want a change." The Deputy Prime Minister, John Prescott, said: "Of course we are disappointed. We always want to win. We should have won up there. But we did out best, we put our case."

Alistair Darling, the Scottish Secretary, risked sparking a civil war in Labour ranks in Scotland by appearing to blame Jack McConnell, the Labour Scottish First Minister, for local policies, including hospital cuts and a rise in tolls across the Forth Road Bridge. It was seen as an attempt to absolve the Chancellor, a close friend, from blame. But Mr Darling later took the blame himself, saying: "I accept entire responsibility for the conduct of this election."

"It was a classic by-election fought very much on local issues, I think all the parties are agreed on that."

Mr Blair called on Labour backbenchers to drop their opposition to his education changes in the forthcoming Bill, which the Government is delaying until it has won over more rebels. He underlined his commitment to the Bill by stopping off on the way to the conference in Liverpool to open the city's first academy. "The reason for this reform is not in order to entrench inequality, but precisely because inequality is entrenched and while one child in any part of any city, town or shire remains with a second-class education, and therefore a second-class start in life, we will not rest, our work is not done.

"If we do this, we will take the achievements so far and build on them."

The result

* Willie Rennie LIB DEM 12,391 +15.7 per cent

* Catherine Stihler LAB 10,591 -16.8 per cent

* Douglas Chapman SNP 7,261 +2.2 per cent

* Carrie Ruxton CON 2,702 -2.5 per cent