In a further blow to Cameron two years after he came to power, his push to create the posts of elected mayors in England's biggest cities was widely rejected in referendums. However, early vote counts showed Conservative Boris Johnson may hold on to the mayor's job in London in the year of the 2012 Olympics. Results are due in the capital from around 1900 GMT.
Cameron said the polls in England, Wales and Scotland had taken place against a "difficult national backdrop", and insisted he would not hide from taking unpopular decisions where necessary. "These are difficult times and there aren't easy answers," he said.
"What we have to do is take the difficult decisions to deal with the debt, deficit and broken economy that we've inherited and we will go on making those decisions and we've got to do the right thing for our country." A BBC estimate based on results in England put Labour up two percent on 38 percent, the Conservatives down four on 31, the Liberal Democrats unchanged on 16. They projected a low turnout of 32 percent.
With results in from 156 of the 181 local councils at the polls, the centre-right Conservatives controlled 40 councils, having lost power in 12. They had 905 seats, losing 374. Centre-left Labour were the big winners, gaining control of 27 councils to give them power in 66, and taking 1,628 seats (up 680).
The centrist Lib Dems controlled six councils, down one, and had 351 seats (down 237).
Across Britain, fewer than a third of English seats were up for grabs, while all seats in Scotland and almost all in Wales were up for election. Northern Ireland is not voting this time. Labour's showpiece gain was wresting back control of Britain's second city Birmingham from a Conservative-Lib Dem coalition after eight years. The council is Europe's largest local authority, representing more than one million people.
In an added embarrassment for Cameron, the Conservatives even lost seats to Labour in his own constituency in Oxfordshire, southern England. Cameron wants elected mayors in all major English cities, but, with three cities pending, only Bristol has backed the idea so far, with Manchester, Nottingham, Sheffield, Coventry, Bradford and Wakefield all rejecting it.
A Labour candidate became Liverpool's first mayor, while Doncaster voted to keep their mayoralty. Labour's gains showed they were winning support in the sort of towns and suburbs in the more affluent south of England where they need backing if they hope to win the next general election, due in 2015. Ed Miliband, whose leadership of the Labour Party was heavily criticised just weeks ago, said the vote was the result of Cameron promising change but delivering disappointment. "We are a party winning back people's trust, regaining ground, but there is more work to do," he said.
"People are suffering from this recession, people are suffering from a government that raises taxes for them and cuts taxes for millionaires." Following a bad month for the Conservatives on a string of domestic issues, some within the party have called for a return to core right-wing values, bemoaning the influence of their centrist Lib Dem coalition partners. Hinting at the frustration in the ranks, Foreign Secretary William Hague said: "Of course the Conservatives can't do everything that we would like to do in government because we are in coalition within the Liberal Democrats."