Independent Kerryn Phelps has ended over a century of Liberal dominance in the Sydney seat of Wentworth, forcing Scott Morrison into minority government.
With counting still continuing, the high-profile GP was on track to defeat Liberal candidate Dave Sharma in the by-election to replace Malcolm Turnbull.
Dr Phelps was projected to hold 54 per cent of the two-party preferred vote on the back of a 21 per cent swing against the Liberals.
Mr Turnbull quit parliament in August shortly after fellow Liberals turned on his leadership in a failed bid to install Peter Dutton but later endorsed Mr Morrison.
A jubilant Dr Phelps danced with supporters before delivering her victory speech.
"This has been a David and Goliath struggle," she said.
She said action on climate change and getting asylum seeker children off Nauru would be her first priorities.
Dr Phelps declined to say how she might vote on a no confidence motion should one be moved in the parliament but indicated she wanted the government to run its full term - which expires in May 2019.
A defiant Mr Morrison told a Liberal function the result was "not unexpected" however he did not have a "vanquished spirit".
"The Liberals are angry and they have expressed that," he said.
"Tonight is a night where we listen, where we learn, where we accept the blows."
However he said the party would "rise again" because it had people like Mr Sharma in its ranks.
Liberal MP Trent Zimmerman said it was a "bad night". Another who supported Mr Turnbull's leadership, Craig Laundy, said he now expected an "internal struggle" over the party's future direction.
But members needed to resist a shift to the Right under Mr Morrison, he said.
"I don't think that has played well in Wentworth," he told Sky News, adding that issues such as climate change were commonly mentioned by voters at poll booths.
Mr Morrison will have to seek the support of Dr Phelps or another crossbench member in order to be assured of confidence on the floor of parliament.
Mr Zimmerman said the government already had guarantees of confidence and supply from crossbench members.
Labor deputy leader Tanya Plibersek said the size of the swing was "historic".
"This shows the values of Scott Morrison are not the values of Wentworth," she said.
She said Labor, whose candidate Tim Murray was sitting on 11 per cent of the primary vote, had "realistic expectations" about his chances in the blue-ribbon Liberal seat.
Ms Plibersek declined to rule out talking to crossbenchers about a no confidence motion in the government.
Mr Turnbull's son Alex tweeted that it was a "great day for Australian democracy". The entire Liberal Party function room booed him when it was shown on television screens.
Attending Dr Phelps' function, her daughter Jaime Chambers said she was excited but nervous.
"I've never been so proud, she's done so many incredible things in her life and in her career and this has got to take the cake."
Australian Associated Press
