Labour has lost control of six councils in Wales in its worst UK electoral performance in 40 years.
First Minister Rhodri Morgan said the party was being blamed for economic problems over which it had no control.
Plaid Cymru lost control of Gwynedd, but made gains in the valleys and Ceredigion, and Liberal Democrats claimed "steady gains".
Conservative leader David Cameron travelled to the Vale of Glamorgan to celebrate his party winning control.
With Monmouthshire remaining in Conservative hands, the Tories are now in the majority on two Welsh county councils - the same number as Labour, which used to dominate local government.
Labour was defeated in its south Wales valleys heartland areas of Merthyr Tydfil, Blaenau Gwent, Torfaen and Caerphilly, in nearby Newport, and it lost the only authority it held in the north, Flintshire.
After the 1999 elections, Labour ran nine Welsh councils, but it now has a majority in just two - Neath Port Talbot and Rhondda Cynon Taf. However, it has regained control of Bridgend, where it fell two short of a majority, but struck an informal deal with two independents.
Plaid Cymru lost control of Gwynedd, with both national party president Dafydd Iwan and the council's leader losing their seats.
Plaid was challenged by a new political group, Llais Gwynedd (Voice of Gwynedd), which formed to fight school closures in the area and picked up 12 seats. But Plaid said it had gained ground in other areas where it had not traditionally done well.
David Cameron and Vale of Glamorgan Tory leader Gordon Kemp in Barry
Mr Morgan told the BBC Labour's poor performance was due to UK factors, with unrelenting bad news headlines.
"There has been a huge amount of bad news on the economy since the credit crunch and Northern Rock," he said.
"Food and fuel price rises were blamed by many people on the government despite the fact that it had no influence over them," he said.
"We get the blame when we are in government even if there is nothing we can do. We have to accept that, because we have been in government for 11 years."
Labour has lost control of Caerphilly, with it and Plaid taking 32 seats each. Here former Labour Welsh Secretary Ron Davies was elected as an independent and his wife Lynne Hughes won her seat for Plaid Cymru.
In Torfaen, Labour's numbers were almost halved, losing 18 of its 34 seats, to take the local authority from a Labour stronghold to no overall control, with independents gaining nine to become the second largest group.
In another traditional stronghold, Blaenau Gwent, Labour lost out as People's Voice, the party founded by the late AM and MP Peter Law, made a breakthrough with five seats.
In Merthyr Tydfil, the party saw its lead slip to independents, with the Lib Dems gaining six seats - their first on the council.
Two points of cheer for Labour were a comfortable win in Neath Port Talbot and gaining ground in Bridgend to take half its 54 seats.
Plaid fell short of the 22 seats needed to win Ceredigion but it is the largest party after three gains, despite losing long-serving councillor Penri James, Ceredigion's prospective parliamentary candidate for the party.
However, Plaid did make gains in Caerphilly, Cardiff and Rhondda Cynon Taf, which it used to run.
The party said the fact that it faced the election as a party of government for the first time with Labour had not harmed it at all.
Plaid Cymru leader Ieuan Wyn Jones called it a mixed night, but said: "We've made it clear we are a party for the whole of Wales".
'Back in contention'
The Conservatives comfortably held their only Welsh council, Monmouthshire, and gained Vale of Glamorgan and expected to have two representatives on the ruling board in Powys after adding five councillors.
Conservative leader David Cameron made a flying visit to Barry in the Vale of Glamorgan on Friday morning.
He said: "I think it shows Wales, north and south, the Conservative Party is back in contention, winning seats."
In Swansea Labour are the biggest party with 30 seats of the 72 seats but it seems the city will once again be ruled by a coalition with Labour unlikely to regain the majority it last held four years ago.
There was also good news for the Lib Dems in Cardiff, where they made three gains to take 35 seats and overall control of the authority. Labour claimed only 13 seats in a city where 12 years ago they held 65.
In Wrexham, where a Lib Dem-controlled board has governed for the last four years, Labour also failed to make a comeback.
Welsh Lib Dem leader Mike German hailed the results as "a good night".
He said: "Across Wales we have been making steady gains, on top of the spectacular gains we made four years ago."
On Anglesey independents retained control, although one prominent independent, John Arthur Jones, lost his Cyngar seat to Plaid Cymru, and another, John Meirion Davies, holder of the education portfolio, lost to the Liberal Democrats.
The independents also retained control of Pembrokeshire with 42 of the 60 seats.
Independents also remained the largest grouping in Carmarthenshire, although Plaid had 14 gains, and Labour 14 losses.