In the biggest swing from the Conservatives to the Labour Party since 1935, Tory candidate Graham Postles polled less than a fifth of the votes in the central England seat of Dudley West, which had been held by Major's party for 15 years.
Voters swept Labour candidate Ian Pearson to victory and sent a clear signal that they were disillusioned by Conservative splits over Europe, tax raises, and allegations of sleaze in Major's deeply unpopular government.
The Conservatives suffered a meltdown: only 7,706 people voted for the ruling party, compared with 34,729 at the April 1992 general election. Labour's vote held steady at 28,400.
Major, visiting a flag factory in the eastern England town of Cambridge, told reporters, "It was a very poor result, but I think some good will come out of it.
"People within the party must now realize they must pull together toward the same end for the good of the country."
The Conservatives, at an all-time low in opinion polls, hope Britain's economic recovery will convert into a "feel-good factor" among voters by the time the next general election is called some time before mid-1997.
Major conceded the good-news message was not getting through to ordinary Britons, still wary following the longest recession since the 1930s.
"People can see the country is doing much better, but they don't see that they and their families are benefiting," he said.
After a catastrophic month, Major, prime minister since 1990, is now hoping the Christmas recess will give him a much needed chance to regroup before the New Year.
The Conservatives' loss of the Dudley seat follows the ejection of eight Conservative legislators from the parliamentary party two weeks ago for refusing to back Major in a vote over increasing Britain's payments to the European Union, which he had declared a matter of confidence. A ninth resigned.
If these nine MPs returned to the Conservative fold, the party would now have a precarious 13-seat majority. These rebels helped Labour vote down a doubling of tax on home heating fuel last week, perhaps the worst defeat suffered by Major.
Dudley was the first parliamentary by-election since Tony Blair took over as Labour leader in July, vowing to lead a new-look moderate party, freed from its hard-line socialist past.
Blair said the resounding victory showed the Conservative agenda of the 1980s had run its course and people were turning to Labour for new ideas. The Conservatives have been in power 15 years.
"It's an extraordinary victory. It's a devastating defeat for the government," he said. "It is a test -- not just of how unpopular and discredited the government are, but also a test of 'new Labour.'"
The minority Liberal Democrats, who have won three by-elections since the last general election, fared poorly at Dudley, crushed by the enthusiasm of voters to vote for the candidate most likely to turn the Conservatives out.
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