The result, in the Democratic primary elections for the Senate nomination in the US state of Connecticut, is regarded as an indicator of American voters' opinion ahead of midterm elections in November.
The Iraqi conflict is a top issue for voters who could force the Republican party to hand control of US Congress back to the Democrats.
Lieberman, the senator for Connecticut and former vice presidential running mate to Al Gore, lost to Ned Lamont, a millionaire with no political experience who ran on a platform of strong opposition to the war in Iraq.
Lamont told his supporters that they had voted for a "big change" and said he would take his anti-Iraq war stance to Washington.
"The people in Connecticut think that staying the course is not a winning strategy in Iraq," he said.
"They want to start bringing our troops home."
The race attracted national attention in America for its emphasis on the war and Democratic anger at George Bush, the US president.
Lamont described the race as a referendum on the war and called Lieberman an enabler of Bush and a "lapdog".
Lieberman, in turn, emphasised his experience and Democratic credentials, also calling himself a reliable opponent of Bush's domestic agenda.
He said he would run as an independent candidate after results showed Lamont led with 52% of the vote.
Lieberman's loss made him only the fourth incumbent US senator to lose a primary since 1980.
He had argued a quick pullout of US troops from Iraq would be "a disaster for Iraqis and for us" but said the Bush administration had made mistakes in its conduct of the war in Iraq.
US Democrats had watched the Connecticut primary closely as a barometer of anti-Iraq war sentiment amongst voters and within the party itself.
Primaries were also held the states of Colorado, Missouri, Michigan and Georgia.