The Liberal Democrats fought off an aggressive Tory challenge in the Greater Manchester seat, holding it with a 3,657 majority, which defied even their own expectations.
The Conservatives expressed disappointment after fighting one of their most energetic campaigns for years. Their failure to win a seat they regarded as natural Tory territory, raises serious questions about their ability to make electoral gains.
But the worst result was for Labour, which was licking its wounds after a disastrous showing. The party lost its £500 deposit after failing to gain 5 per cent of the vote.
The Liberal Democrat victory gives Mr Kennedy a crucial breathing space, after mutterings from his MPs about his leadership style and lack of progress in the polls since the general election. Mr Kennedy adopted a high profile during the campaign and visited Cheadle six times to bolster support for the candidate, Mark Hunter.
His MPs now expect Mr Kennedy to maintain the momentum to score further points against the Tories, and are privately warning him "not to go into hibernation" over the summer.
On Monday, Mr Kennedy will reassert his authority with a speech setting out his vision for the Liberal Democrats. He will then hold a meeting in London with his MPs to give the party a "bounce" before Parliament breaks for its summer recess on Friday. Mr Hunter will take his seat in the Commons on Tuesday.
The by-election was caused by the death of the sitting Liberal Democrat MP, Patsy Calton, from cancer. She fought the general election from her hospital bed and died after taking the oath in the Commons.
Lord Rennard, the Liberal Democrat chief executive and elections mastermind, said: "It is most unusual for a party defending a seat to have a swing in their favour. This is a completely humiliating result for the Conservatives who ploughed every possible effort into what was their number one target at the general election."
The Tories fought a negative campaign, even accusing the Liberal Democrat candidate of planning to take away pensioners' bus passes. The result gives the Liberal Democrats a stronghold in the Greater Manchester area, including Cheadle's neighbouring seats Manchester Withington and Hazel Grove
The victory is a personal boost for Mr Kennedy after a disappointing general election at which the party failed to gain several target Tory seats in its "decapitation strategy". Mr Kennedy plans to be out of London during August, in his Scottish constituency and on holiday. And some of his more senior MPs believe he could face a difficult autumn conference unless he capitalises during the summer on Tory disarray during their leadership contest.
Result: Mark Hunter (Lib Dem) 19,593 (52.15 per cent); Stephen Day (C) 15,936 (42.42 per cent); Martin Miller (Lab) 1,739 (4.63 per cent); Leslie Leggett (Veritas) 218 (0.58 per cent); John Allman (Alliance for Change/Suffering Little Children) 81 (0.22 per cent)Reuse content