Labour are eight points ahead of the Tories according to the BBC's projected share of the national vote after local elections in England and Wales.
Labour are set to add more than 700 seats and have taken control of nearly 20 councils including Birmingham.
Based on results so far, Labour is projected to end up with a 39% national share of the vote, up three points, with the Tories down four on 31%.
The Lib Dems' share of the vote is estimated to be unchanged at 16%.
Labour said the results - which saw them sweep a series of councils in the south-east of England and the Midlands - were "encouraging" but the Conservatives said they had suffered a "bad night".
The UK Independence Party also fared well, boosting their vote by 5% mainly at the expense of the Tories.
More than 4,700 seats have been contested on 128 English councils in what is seen as a crucial mid-term test of David Cameron's coalition government.
All 21 unitary authorities in Wales are electing new councillors while counting in Scotland - where every seat on 32 unitary authorities is also up for election - will not begin until later on Friday.
Labour victories
Londoners have also been voting for a new mayor - but they will have to wait until Friday evening to find out who has won that contest, but an eve-of-poll survey suggested Boris Johnson will triumph.
Labour were given an early boost when they took control of Harlow and Great Yarmouth directly from the Conservatives and also gained control of Nuneaton, Exeter and Carlisle - which no party previously controlled.
Further Labour gains came in Norwich, Southampton, Reading and Plymouth, where Conservative MP Gary Streeter said the Conservatives had suffered a "drubbing" - due in part to Tory voters defecting to UKIP.
"People were unhappy about the last two months of our government," he said. "We have to regain our sure-footedness if we are to regain lost trust and confidence."
Conservative activists were concerned their leadership "was not Conservative enough", Mr Streeter added.
Although UKIP have only gained two extra councillors, they are averaging about 14% of the vote where they are standing and their performance will increase pressure on the Conservatives to take a tough stance on Europe.
Elections expert Professor John Curtice said Labour were well ahead of 2008 - when the party suffered one of the worst nights in its history and up about 2% to 3% on their performance in the same wards last year.
In what shadow justice secretary Sadiq Khan said was a "major achievement", Labour also took control of Birmingham for the first time in eight years after picking up 20 seats.
Conservative co-chair Baroness Warsi told the BBC it was "going to be a bad night" for the party but it must be remembered they were defending seats won in 2008 when they were in opposition.
Communities Secretary Eric Pickles acknowledged the government had been through a "sticky patch" but said the results were "entirely predictable" and would not necessarily be repeated at a future general election.
'Fall guys'
The Lib Dems are on course to lose about half of the seats they are defending, so far losing all the seats they contested in Manchester, Sunderland and Rochdale.
Their share of the vote is expected to be the roughly the same at last year, when they suffered one of their worst performances in recent decades.
Former Lib Dem MP Evan Harris said such a performance would be "disappointing" and the party could not continue to be the "fall guys" for unpopular coalition decisions.
But former chief executive Lord Rennard said his party's candidates were doing much better in seats where their principal opponents were Conservatives.
Meanwhile, government-backed plans for elected mayors across England were dealt a major blow after the residents of Manchester, Coventry and Nottingham rejected the idea in referenda, all by sizeable margins.
The leader of the Labour group in Birmingham said he expected voters in the city to also reject the proposition.
The results of other polls in Bradford, Bristol, Leeds, Newcastle-upon-Tyne, Sheffield and Wakefield are awaited.
In Liverpool and Salford - where the local councils have already opted for the mayoral system - results are due later. The Labour candidate in Liverpool - former council leader Joe Anderson - is regarded as the strong favourite
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