The by-election result showed that the Conservative vote has more than halved from 20 per cent in 1997 to nine per cent this week in the Greater Manchester seat, a city which is seen as a crucial battleground in the 2015 general election.
Labour leader Ed Miliband said the Tories “should be deeply worried” after his party held the seat comfortably with 55 per cent of the vote.
Former councillor Mike Kane won the Greater Manchester constituency for Labour, polling 13,261 votes, while the UK Independence Party surged from fifth place to second despite leader Nigel Farage complaining the campaign had been “as dirty as they come”.
The eurosceptic party’s success and the 11 per cent decline in the Tory vote was yet another by-election blow to Prime Minister David Cameron, who saw his candidate defeated by Ukip for the sixth time since the 2010 general election.
The Liberal Democrats were dealt a humiliating blow when they polled just 1,176 votes - not enough to hold their deposit.
Mr Cameron denied the result represented a breakthrough for the Opposition and said the Tories were never expecting to do well in a rock-solid Labour seat.
But Mr Miliband claimed the Tories were not addressing the issues affecting voters in the constituency such as the cost of living and the NHS.
Speaking in Wythenshawe, Mr Miliband said: “Last night was a very good result for Labour. We added to our share of the vote, we gained support.
“We saw the governing parties - the Conservatives and the Liberal Democrats - in total retreat.
“This is a constituency where even in 1997 the Conservatives were polling over 20 per cent of the vote. So I think they should be deeply concerned.
“They’ve been telling people that everything’s fixed, that the economy is fine, that the cost of living crisis isn’t there. The people of Wythenshawe and Sale East know differently.”
The by-election was brought about by the sudden death of serving MP Paul Goggins on January 7, at the age of 60.
In his victory speech, Mr Kane said voters had “sent a very clear message” to the Government, adding: “They have rejected the failed policies of the out-of-touch Tories, they have rejected the isolationism and scaremongering of Ukip.
“It’s a result which emphatically demonstrates that people here know the NHS is not safe in David Cameron’s hands, and that we’ve had enough of his utterly out-of-touch Government.”
Mr Cameron described the result as unsurprising, saying: “Obviously, the Wythenshawe by-election was in a very safe Labour seat and there was never much doubt about the result.”
The Conservative leader said: “When people know that there is a by-election they know that the Government isn’t going to change, but obviously messages are sent and signals are sent and protests are made. Government should always listen to those and I always do.
“Obviously, one would prefer to come second rather than third, but I don’t think this is a particularly surprising result in Labour holding this seat.
“I don’t think it was the sort of breakthrough that people were talking about.”
Wythenshawe is the latest in a number of by-elections that have seen Ukip take second place, including South Shields and Eastleigh last year.
Mr Farage, speaking from the count at Manchester Central convention centre, said he was pleased with how his party performed but complained forcefully about the way the election was run, with postal votes issued just three days after the poll was called.
Mr Farage said that Ukip’s performance in increasing its share of the vote by 14.5 per cent to 18 per cent represented “really good, solid, steady progress”.
Ukip candidate John Bickley said he was “over the moon” with the result and claimed his party was “in better shape” than the Conservatives.
Labour increased its share of the vote by 11 per cent to win by an emphatic margin of 8,960 votes.
But the figures made gloomy reading for the Liberal Democrats, with the party’s vote share plummeting by 17 percentage points to take them below the crucial 5 per cent needed to hold their deposit.
Liberal Democrat president Tim Farron said that the party’s result in Wythenshawe was “genuinely very disappointing”, describing it as part of a pattern of “patchy” results which have seen the Lib Dem vote hold up in areas of strength but collapse elsewhere.
He said: “The reality is that in by-elections in the past Liberal Democrats were often the none-of-the-above party, and the reality is now we are one of the above.”
Some 24,024 votes were cast - a turnout of 28.24 per cent.