Votes were still being counted after regional and council polls held on Thursday, but early results showed support for the centre-left Lib Dems, junior coalition partners in a Conservative-led government, had plunged.
"We've taken a real kicking in the ballot box tonight," Lib Dem lawmaker John Leech wrote on social messaging site Twitter.
Lib Dem popularity has plummeted since they formed a coalition with the centre-right Conservatives last year, a decision that put them into government for the first time in 80 years and created Britain's first coalition since World War Two.
The government has embarked on a programme of swingeing public spending cuts to reign in a record budget deficit.
Ruling parties often perform badly at local elections and results in these "mid-terms" are not a clear indicator of how people will vote in a general election.
Ill-tempered spats between the Lib Dems and Conservatives in the run-up to Thursday's votes could make the work of cabinet more difficult but few expect either partner to force a split and risk propelling the opposition Labour party into government.
'No' to alternative vote
Results at 0300 GMT (4 a.m. British time) showed that Labour had gained 142 council seats and the Conservatives three, while the Lib Dems had lost 100, according to the BBC. More than 8,000 seats were contested.
In Sheffield, the city which party leader Nick Clegg represents in parliament, Labour overtook the Lib Dems to become the largest party on the council - picking up nine seats from their rivals.
Britons were expected to reject a proposal to change the country's voting system.
In the first nationwide referendum for more than 30 years, Britons were asked whether if they wanted to replace the first-past-the-post method of electing Westminster politicians with an "alternative vote" system in which they could rank candidates in order of preference.
Opinion polls before polling day on Thursday suggested most people would reject the proposed change -- a further blow to the Lib Dems, who made a vote on electoral reform a key condition of joining the larger Conservative party in government.
The Conservatives opposed the alternative vote, and the campaigns mounted by both parties sparked angry exchanges between ministers. The main opposition Labour Party was divided on the issue, although its leader Ed Miliband supported change.
Most opinion polls make Labour, which lost power a year ago after 13 years in government, the most popular party.
The referendum took place alongside local elections in parts of England, and elections for devolved assemblies in Scotland, Northern Ireland and Wales.
Scottish referendum to be held 'later'
Early results showed a strong swing to the Scottish National Party (SNP) in Scotland, which could pave the way for a referendum on Scottish independence.
Early wins for Alex Salmond's SNP were a blow to the Labour party, which had hoped to do well in Scotland, its traditional stronghold, as it tries to rebuild itself after defeat in last year's UK general election.
"It is clear from the indications we've had so far that it is likely the SNP has been bestowed trust in a way that no party ever has before in a Scottish election," Salmond said after he retained his seat in the Scottish parliament.
"We will take that mandate and that trust forward. We'll take it forward to increase the powers of our parliament."
Salmond has proved a popular leader in Scotland, using funds from central government to provide free university tuition for Scottish students and free medical prescriptions - things that have to be paid for in England.
Since devolution in 1999, the Edinburgh-based parliament has taken control of health, education, the legal system and other departments and is seeking greater financial independence.
In 2007, the SNP beat Labour by one seat to become the Scottish administration's largest party and formed a minority administration. It has long pledged to hold a referendum on Scottish independence, though support for ending the 300-year-old union with England is lukewarm among Scots.
Salmond said in a television debate this week he would delay a referendum on independence for Scotland until later in a new five-year term. He said he wanted to concentrate on economic recovery and job creation to fight recession.
Final results are expected later today.
(EurActiv with Reuters.)