The final election night count gave Mr Peters 15,359 votes to 11,347 for National's Mark Osborne.
Labour's Willow Jean Prime got 1315 - well down on the 9000 she got last September as Labour voters clearly voted strategically for Mr Peters instead.
Mr Peters said Mr Osborne had rung him to concede.
After the vote was in, Mr Peters arrived at the Duke of Marlborough Hotel in Russell to be met by cheering supporters.
"Tonight, we must thank the people of Northland who put aside their party preferences and came out to vote for Northland," he said.
Mr Osborne said he had no regrets about his campaign, but described the loss to Peters as a "perfect storm".
"It was a byelection which came out of left field, you've got someone like Winston Peters who's got a lot of name recognition."
He said National's lengthy candidate selection process meant the campaign started two or three weeks later than others and Labour voters had backed Mr Peters in droves.
Mr Osborne said he still wanted to be involved and would not rule out seeking selection again in 2017.
Mr Peters described the campaign as "gruelling", and said Mr Osborne should not get the blame for National's loss, which was a result of decades of political neglect Mr Osborne had nothing to do with.
National's campaign director Steven Joyce gave Mr Peters credit for a good campaign, saying he got ahead early and National was unable to make up for lost ground.
"People were signalling they wanted to send a message, in [Peters'] words, and they've done that tonight. Our job is to make sure we earn the right to represent Northland again."
Mr Joyce said National had expected it to be tight, but underestimated the extent to which Labour and Green voters would get behind Mr Peters. He said Mr Osborne had worked hard, and he hoped he did seek selection again in 2017.
Mr Osborne said he did not believe Mr Peters would be an effective MP.
"We'll be looking to make sure he delivers for Northland over the next 2.5 years."
He pointed to the promises Mr Peters had made, including rail links and upgrade to Whangarei's port - promises which were much more expensive than National's $69 million bridges upgrade.
"You have our understanding and our sympathy, and no one should hold you accountable for vast neglect and political abandonment."
The mood was jubilant at the NZ First campaign night headquarters, the Duke of Marlborough Hotel in Russell.
Among those celebrating was former Labour MP Shane Jones, who is now an ambassador. His decision to attend Peters' event rather than Labour's will add to speculation he may consider a return to Parliament with NZ First.
The National Party had mounted a massive campaign effort, shipping in ministers almost daily. It also put in a big push in the final few days with a mercy dash by the Prime Minister, and phone canvassing and door-knocking to get the voters out.
However, it appears to have been to no avail - Peters and his Force for the North bus steamrolled National's massive party machine, completely demolishing the 9000 vote majority former MP Mike Sabin won in the election just six months ago.
Green Party co-leader Metiria Turei said the National Party's loss was proof that the tide had turned on "an increasingly out of touch Government".
Ms Turei congratulated Mr Peters on winning the seat from National.
"This is a deeply embarrassing loss for National in a traditionally safe seat," she said. "The loss of Northland shows how out of touch the National Government has become with ordinary New Zealanders."
- by Claire Trevett
