Mr Lee's beef deal has sparked angry protests in South Korea
South Korea's ruling party suffered a heavy defeat in its first electoral test since President Lee Myung-bak took office, amid a row over beef imports.
In sharp contrast to its election landslide last year, the Grand National Party won only 10 out of 52 seats being contested in local polls.
Mr Lee's popularity has plummeted over the April deal to resume US beef imports.
Protesters say he is putting them at risk of mad cow disease, or BSE.
The issue has triggered weeks of demonstrations in the capital, Seoul, and led to scores of arrests.
The local polls were the first since Mr Lee took office in February.
The main opposition party, the United Democratic Party, took 22 seats. Others went to minority parties and independent candidates.
A spokesman for the ruling party said it "humbly" accepted the poll result.
Public anger over the beef deal, meanwhile, shows little sign of easing.
South Korea used to be a major market for US beef, but banned most imports in 2003 after BSE was found in cattle there.
In April Mr Lee's government agreed to relax most of the restrictions - a move linked to approval of a bilateral free trade deal.
This triggered public anger, even though the government described concerns over the beef as "unfounded rumours".
On Tuesday, the government said it had asked the US to stop exports from cattle aged more than 30 months, in a bid to assuage popular concern.
But protests continued on Wednesday night and on Thursday thousands of demonstrators are set to begin a 72-hour protest over the issue, Yonhap news agency said.