Attention is now focused on the race to be London mayor, where Conservative Boris Johnson is seeking to defeat Labour's Ken Livingstone.
Counting of the 2.4m votes began at 0830 BST with a result not now expected before 2400 BST. With about half of the votes counted, Mr Johnson was ahead in nine out of 14 areas on first preference votes. London's Evening Standard newspaper has called it a win for Mr Johnson.
But as election fever gripped Westminster, Labour had further bad news as the party's newly appointed general secretary, David Pitt-Watson - a City fund manager - decided not to take up the position.
Mr Pitt-Watson, believed to have been Mr Brown's choice, was appointed after Peter Watt resigned over the row about donations from businessman David Abrahams.
And senior Labour backbencher Ian Gibson said Mr Brown had six months - up to the party conference - to move the party forward or risk losing the next general election.
In the local elections - where results continue to come in - the Tories have had a 4% higher share of the national vote than in last year's local polls.
Such a share in a general election would have the potential to give the party a Commons majority of 138.
Mr Brown told reporters: "It's clear to me that this has been a disappointing night, indeed a bad night for Labour."
He conceded that the government had "lessons to learn", but insisted: "My job is to listen and to lead."
The test of leadership is not what happens in a period of success but what happens in difficult circumstances
In Wales, Labour lost control of five councils and could also be out of office in another.
Labour was defeated in its south Wales valley heartland areas of Merthyr Tydfil, Blaenau Gwent, Torfaen and Caerphilly. It also lost Flintshire.
Ministers were trying to put a brave face on the results and pledging to listen to voters' concerns.
Deputy Labour leader Harriet Harman told BBC Radio 4's Today programme the results had been "very disappointing indeed", but said the elections had taken place against a background of rising economic concerns.
"We didn't respond early enough to those groups of people who were going to lose out as a result of the change in the 10p rate which overall benefits lower income people but there were some people who lost out and we didn't react early enough," she said.
Labour's chief whip Geoff Hoon said: "There's no crisis. This isn't something that's going to affect the fundamental stability of the government."
Liberal Democrat leader
Mr Clegg told BBC Breakfast: "We were 13% a few months ago, we're now 25%. We've over-taken Labour, we've taken seats off the Conservatives, we've taken seats off Labour.
"If you call that a disappointment then we inhabit different planets. I am actually delighted, we are regaining momentum."
More than 4,000 seats on 159 councils were up for grabs in Thursday's elections, as well as the London mayoralty and assembly.
All seats are up for election in the 22 Welsh unitary authorities.
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