Labour's losses are a major blow to Gordon Brown's government, which has faced criticism over rising fuel, food and energy costs and falling house prices.
The government's recent economic record and tax policies have also proved unpopular with voters.
In the local polls, held only in England and Wales on Thursday, the Tories took a 44 per cent share of the national vote.
The results would be enough to secure them a sizeable parliamentary majority if they were to be repeated at a general election.
The Liberal Democrats took 25 per cent and Labour 24 per cent, the BBC said.
With results from all 159 local councils counted, the Conservatives controlled 12 more at 65, Labour lost control of nine to leave 18, and the Liberal Democrats were up one at 12.
Worryingly for Brown, Labour lost seats in key heartlands such as south Wales, while the Conservatives made gains beyond their southern England power base in the north.
With all the results counted from local councils in England and Wales, Labour had lost 331 councillors and the Conservatives had gained 252.
Analysts had said that a loss of more than 200 councillors for Labour would be a very bad result for the party.
The treasury will be under pressure to come up with new measures to restore Labour's strong economic card.
Julia Clark, of the Ipsos Mori Social Research Institute, told Al Jazeera: "Gordon Brown and the Labour party are going wrong right now in the sense that they've made a series of big errors, the most recent of which was a U-turn on a taxation policy.
"[This] was initially very unpopular, and the fact that they changed their minds was also very unpopular.
"This along with a number of other things have accumulated to paint a very bad picture for Labour.
"They are seen as very negative and indecisive, and it's clearly been shown in the voting results."
The London assembly election results also showed the British National Party (BNP), a far-right party, make an electoral breakthrough by gaining its first seat.
Richard Barnbrook, a Royal Academy-trained former artist, was elected to the 25-member body via the proportional representation system.
The result means he can now take up a seat at City Hall to scrutinise the mayor's decisions.
Barnbrook, who leads the BNP group on Barking and Dagenham Council in east London, also stood as the party's candidate for London mayor.
He came fifth out of 10 candidates with 69,710 first preference votes, just 7,664 less than the Green Party's candidate, who came fourth.