Labour conceded today that voters had given it "a kicking" after it plunged to third place in the local elections.
Home Secretary David Blunkett said he was "mortified" by the results and Deputy Prime Minister John Prescott admitted it was "not a great day" for Labour.
With more than half of the results in, Labour had lost more than 200 seats. It lost control of seven councils, including Newcastle for the first time in 30 years.
Tory leader Michael Howard said the Tories had opened up a big enough gap from Labour to win the next general election.
Labour is in third place, according to a projection of the results already in from more than 90 councils.
The Conservatives polled 38%, putting them within striking distance of a majority at a general election, according to a BBC projection.
The Liberal Democrats were second on 30% while Labour trailed on 26%, according to the projection from more than 400,000 votes in the poll.
It is believed to be the first time the governing party has been forced into third place in such a test of public opinion.
Mr Prescott conceded Labour had done badly. He said the war in Iraq was a crucial factor, but he insisted the general election would be fought on the battleground of public services.
"People like those policies," he said.
"But they didn't judge this election on that. Iraq was a cloud, or indeed a shadow, over these elections. I am not saying we haven't had a kicking. It's not a great day for Labour."
Speaking on BBC Radio 2, Mr Prescott said Labour now had to to convince voters that its domestic policies were working. But he said the results provided little for the Tories to celebrate.
"Mr Howard is not capturing the councils he should have been capturing if he wants to make a break," he said.
Mr Blunkett said it had been a bad night for the Government, and conceded Iraq was a major factor.
"I am mortified that we are not doing better than we have done," he said. "We know it has been a bad night, but we are obviously going to have to present the facts as they are.
"A bad night for us, but not meltdown. No take-off for the Conservatives. They haven't even got the undercarriage down, never mind managed to actually get across the Atlantic or - dare I say it - the English Channel."
The results will prompt renewed speculation over Tony Blair's future. The Prime Minister has reportedly said he would stand down if he became an electoral liability.
Asked if he accepted the Blair era was nearly at an end, Mr Blunkett said: "No, I don't."
With results in from 92 authorities Labour had lost 230 seats and controlled seven fewer councils, with losses including Swansea and Burnley.
The Tories took an extra 113 seats and power in eight more authorities, including Trafford, the first major metropolitan council to declare. The Lib Dems were up 70 seats but two councils down.
Speaking on BBC Radio 4's Today programme, Mr Blunkett said the war in Iraq had cost Labour votes.
"Some people felt it was the wrong policy," he said.
Mr Howard said the results gave the Tories an ideal platform for the next general election.
Speaking after a visit to a school in Leicester, his first official engagement since last night's local election results, he said: "When it comes to the general election, what's important is the gap between the Conservative and Labour parties.
"We have to be 11.5 points ahead to win the general election. On last night's results, we were 12 points ahead."
He added: "We had excellent results last night. We are now represented up and down the country in cities where we want to play an important part.
Labour had been braced for bad results. Mr Blair had conceded Iraq cast a shadow over the Government's support.
There could be further bad news for Labour, with a second wave of councils declaring their results later today.
They include big metropolitan authorities such as Birmingham and Sheffield where Labour is expected to do poorly.
There is also the possibility of embarrassment for Labour in the London mayoral election. Ken Livingstone was facing a close contest with Tory Steve Norris to hold on to his position.
Defeat for Mr Livingstone would be a real snub to Labour. Mr Livingstone won the last election running against Labour, but he has now been readmitted to the party, standing as its candidate.
A YouGov poll suggested he would scrape in for a second term.
Labour will hope the local election results will be overshadowed by the results of the European Parliament polls. They will be announced on Sunday, with indications that the UK Independence Party could hit the Tory vote.
But the Tories will be determined to keep the focus on the council elections. Liberal Democrat leader Charles Kennedy said he was "absolutely delighted" with what he called the party's best ever result.
Speaking on the steps of party HQ in central London, he said the Liberal Democrats' predicted second place was "a dramatic advance" and "augurs very well indeed" for a general election.
"The general election is going to be much more a three-party contest," he said.
"The Lib Dems are emerging as an effective alternative to the Government across huge swathes of the country.
He said he thought the results were about "more than Iraq", reflecting "a sense of mistrust in the Prime Minister and the Government".