Labour has held Stoke Central as Gareth Snell secured a comfortable win of 7,853 to his challenger’s 5,233, to be elected as the city’s new MP.
Ukip campaigned hard in the constituency in the hope of capitalising on its overwhelming support for Brexit.
But Mr Nuttall’s campaign was hit by a series of setbacks, including being forced to apologise for a false claim on his website that he lost “close friends” in the Hillsborough disaster.
Mr Snell also faced a rocky campaign after it emerged he had described Jeremy Corbyn as an ‘’IRA-supporting friend of Hamas” and called Brexit a “massive pile of shit”.
But the seat has been held by Labour since it was created in 1950 and the party secured a 5,179 majority in 2015.
Labour secured a 2,620 majority but its vote share fell by around 2%, while Ukip’s went up by the same amount.
Mr Nuttall said Ukip was “not going anywhere” and insisted the party’s “time would come”.
“There’s a lot more to come from us,” he said.
“We are not going anywhere, I’m not going anywhere.”
The Ukip leader said the “whole Hillsborough thing” had not been an issue on the doorstep.
Quizzed on whether he would stand again, he replied: “I’ll probably stand in the general election in 2020.”
When asked what would happen to Mr Nuttall if Ukip failed to win, party chairman Paul Oakden said: “He has a well-earned rest and then he comes back and leads our party, I suspect.
“The whole narrative of Paul’s leadership depends on winning in Stoke is a nonsense.”
Mr Nuttall was branded “a carpet-bagger” by Mr Dromey, MP for Erdington in Birmingham.
He added that while Labour was still “the party of working people”, it had more work to do if it wanted to win back public confidence and return to government.
But he said the party had showed in Stoke that it could listen to people’s concerns, by selecting a “local and proud” candidate in Mr Snell.
He added there was a wider political debate to be had about broadening the “pool of people we draw MPs from” saying it should feature more factory workers and “dare I say, chief executives”.
On the night Ukip beat the Conservatives into third by just 79 votes, polling 5,233 to 5,154.
Mr Snell said voters had chosen “the politics of hope over the politics of fear”.
He added: “Our city has been the focus of a media which all too often prefers to dwell on our problems instead of highlighting our achievements.
“But over these last few weeks a city lazily dubbed by some as the capital of Brexit has once again proven to the world that we are so much more than that.
“We have said with one voice that hatred and bigotry are not welcome here. This is a proud city and we stand together.”
Earlier in the evening while speaking on BBC Question Time, Ukip’s only MP Douglas Carswell appeared to concede defeat to Labour in Stoke hours before the result.
The MP for Clacton said: “I think the most likely outcome is that Labour will win.
“Stoke is not even in our top 50 target seats.”
Official turnout was 38.16%, with 21,200 votes cast.