The Prime Minister was under fire for "parachuting" in Andrew Slaughter, leader of Fulham and Hammersmith council, who was defeated by the Conservative John Randall, increasing the Tory majority from 724 at the general election to 3,766.
The leadership is braced for more trouble over its vetting of candidates for the forthcoming by-election in Paisley South, following the death of Gordon McMaster. However, senior Labour sources made it clear that there will be no change in their powers to impose candidates for high-profile by-elections.
"There is no question of our changing the system," said one senior Labour source. The row coincided with the publication of the resignation honours list which includes peerages for former Labour MPS who are believed to have been persuaded to stand aside at the election to allow Blairite candidates to be parachuted into constituencies.
The defeat may have heralded the end of the honeymoon for Mr Blair with the voters, and the Tory leader, William Hague, appeared at a local pub called The Turning Point to drive home the message that it may also mark the start of the Tory recovery.
Mr Blair, cushioned by a massive Commons majority, was relaxed in spite of the Uxbridge setback. With MPs starting their holidays, and Parliament in recess until the end of October, the dissent will be muted.
But the Tory victory in Uxbridge, although a Tory seat, fuelled the Labour rumblings of discontent which have recently begun to surface over policy such as student fees, and further party modernisation plans - "Partnership in Power - that will be attacked at the annual party conference.
Labour sources said that Mr Slaughter, a former adviser to Michael Meacher, was chosen to replace a local Labour councillor, David Williams, who stood in the seat on 1 May, to avoid exposing Labour to attacks on local issues, including building in the green belt. But the Tories exploited the local links of their candidate, the owner of an Uxbridge department store.
Mr Williams said that local people were saying they would have voted Labour, if he had been the candidate. "We do need to pick horses for courses. I am not saying I would have been a better candidate than Andrew Slaughter. There has to be more analysis made of what the seat needs."
Councillor Peter James, chairman of the Labour group on Hillingdon council, which includes Uxbridge, said: "Far from the Tories winning this election, I think that Labour did a very good job at losing it. We had a very good candidate at the general election, David Williams, and he should have been standing at this by-election.
"I am convinced that if he had been standing we would have been waking up this morning with a Labour MP. We had a candidate imposed on us and lot of people were upset by that. There were very few local activists working in that campaign."
Some of Mr Blair's key lieutenants privately were being accused by civil servants of exerting political influence in Whitehall after it emerged that three government chief press officers are to leave: Jill Rutter, the head of the Treasury press office; Andy Wood, head of the Northern Ireland press office, who went on leave on Thursday; and Liz Drummond, the director of the Scottish Office press office who will leave in September.
They are leaving amicably but the clear-out was described by one civil servant as "being like the night of the long knives".
Ms Rutter, who clashed with two political advisers under Gordon Brown, jokingly compared herself at a leaving party in Whitehall with the Princess of Wales, saying that there had been "three in the marriage".
Downing Street also announced that Sir Richard Wilson, permanent secretary at the Home Office, will replace Sir Robin Butler as the Cabinet Secretary.
Mr Blair interviewed a number of candidates, but his choice of Sir Richard, 54, was seen as a signal that there will be no radical change at the centre in Whitehall.
It was believed to be a disappointment for one of the other main candidates, Andrew Turnbull, John Prescott's permanent secretary at the Department of Environment, Transport and the Regions.
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