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The constituency is the first the Conservatives have had to defend since coming to power at the head of coalition government in 2010 and is a bellwether of UK politics whose voters have backed the winning party in every general election since 1983.
Britain's political parties are already gearing up for the next national election in 2015, and two likely important themes - ties with Europe and the economy - featured prominently as reasons voters in Corby gave for rejecting the Conservatives.
Ominously for Prime Minister David Cameron's centre-right Conservatives, the UK Independence Party (UKIP), which has wooed rightists with its promise to yank Britain out of the European Union, had its strongest showing in any local poll since the party was founded in 1993.
"It's a terrific result... It's our best ever by-election result," said UKIP candidate Margot Parker.
"It's a massive protest. They (the voters) are not happy ... they're listening to us and we're listening to them. We'll keep taking Conservative vote, and Labour votes as well," she said.
The Labour candidate polled 17,267 votes to the Conservatives' 9,476, taking just under half the votes cast and overturning the Conservatives' slim 2010 majority of 1,951. UKIP came third with 5,108 votes.
The Conservatives' governing coalition partners, the Liberal Democrats, came fourth and suffered the humiliation of losing their 500 pound ($800) deposit for not managing to win five percent of the vote.
Labour victor Andy Sawford said the result marked a turning point in his party's fortunes, as it won its first by-election in a Conservative-held seat for 15 years.
"Since this constituency existed, no party has formed a government without winning here. The road to Downing Street runs through Corby," said Labour victor Andy Sawford.
Conservative ministers shrugged off the defeat, suggesting it had little relevance ahead of full national elections in 2015.
"It's a by-election in mid-term. This is what happens to governments," interior minister Theresa May told Sky News.
But Labour leader Ed Miliband said the result showed that voters in "middle England" were returning to his party.
"If I were Mr Cameron I wouldn't just dismiss this result. People are saying you are not standing up for us ... you are standing up for the richest and most powerful people in this country and that is a lesson he should learn," said Miliband.
Labour leads the Conservatives nationally by 10 percentage points according to a opinion poll by YouGov, conducted on Wednesday and Thursday.
The constituency of Corby comprises the working class town of the same name, where unemployment and home repossession are relatively high, as well as the surrounding, affluent rural region of east Northamptonshire.
The region is considered a microcosm of the English political landscape, and election victories there are usually marginal.
The current by-election was triggered by the resignation in August of Conservative lawmaker and novelist Louise Mensch, who stood down to spend more time with her family.