Labour has defended its local election showing amid concerns about the campaign from within its own ranks.
Ed Miliband's party is on course to beat the Conservatives by two points, gaining almost 300 councillors.
But along with the Lib Dems and the Tories it saw UKIP eat into its support - in Essex, the Midlands and the North.
Having lost control of 11 councils, one prominent Tory backbencher said his party had to "reconnect" with its core support after an "unsettling" result.
The Conservatives were around 200 seats down with only two councils left to declare on Saturday morning.
'Biggest party'Chancellor George Osborne is due to address supporters at a London conference at which high-profile donor Lord Ashcroft will reveal the results of a large-scale opinion poll in marginal seats.
- With 159 of 161 councils declared, Labour has gained 292 seats, UKIP has gained 155 seats, the Lib Dems have lost 284 and the Conservatives have lost 201
- Seven Conservative councils in the south of England have gone to no overall control, some following UKIP gains.
- Labour is set for its best performance in London since 1998
- Essex has voted strongly for UKIP - and the party has also increased its share of the vote in the north.
- But it has fared worse in London, losing four councillors in Hounslow
- The Lib Dems lost all their remaining nine seats on Manchester Council
- Turnout looks set to be about 36%
- Results from the UK-wide European election will not be known until late Sunday; counting in Northern Ireland is only halfway through.
- You can follow full coverage with all the latest updates at bbc.co.uk/vote2014.
Late on Friday night, Health Secretary Jeremy Hunt insisted it was Labour that should be worried by the results.
"No opposition party has ever won a general election without being the biggest party in local government," the Conservative minister told the BBC's Newsnight.
"We are going to be the biggest party in local government."
Senior Labour figures Yvette Cooper - the shadow home secretary - and shadow chancellor Ed Balls both said their party now needed to talk "more" about immigration.
Another shadow minister told the BBC Mr Miliband still had to "weave a clearer narrative" on what he was offering to voters.
But shadow business secretary Chuka Umunna said: "Importantly we have got the biggest share of the vote in the areas which are the boundaries of some of the key marginal seats."
Michael Dugher, shadow minister for the Cabinet Office, says the party is making "extremely good progress" but that its members are "not complacent".
He told the BBC: "I'm pleased that we won in those key battleground seats.
"I'm realistic but I'm also aware that in some of or heartland areas, we did lose seats to UKIP and that is an area where we're going to have to work much harder."
The party is keen to stress its successes in areas it needs to win come next year's general election.
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Ed Miliband: "I'm determined over the next year we persuade them [UKIP voters] that we can change their lives for the better"
There has been an "awful lot" of criticism of Ed Miliband, according to the BBC's political correspondent Alan Soady.
He said: "I think it is a wake-up call for some in the party leadership that UKIP can do a substantial amount of damage to their vote in their traditional heartlands.
"I think previously they had assumed that largely UKIP would do more damage to the Conservatives than Labour."
UKIP, meanwhile, said leaving the EU would not be a deal-breaker should it continue its rise and win seats at Westminster.
"I don't think we'd be so arrogant to think that we'd be allowed to dictate to the entire government that they must leave the EU without a referendum," director of communications Patrick O'Flynn said.
"It would be a way of guaranteeing that the referendum actually took place," he told BBC Radio 4's Any Questions.
The BBC's projected national share of the vote suggests UKIP would have scored 17% in a country-wide election.
Labour would have got 31% of the vote, just two points ahead of the Conservatives on 29% with the Liberal Democrats on 13%.
UKIP's projected national share figure is lower than the 23% it got in council elections last year.
Yet the challenge from Nigel Farage's party, which took council seats from all three main parties in England, prompted one Conservative to reflect on voters' lack of "trust" and "respect" for his party.
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David Cameron: "We've got to work harder and really deliver on issues that are frustrating people"
Adam Afriyie - once mooted as a leadership challenger to David Cameron - said: "Many of our core supporters feel alienated and disillusioned."
Writing on the Conservative Home website, he said many supporters felt "duped" and called for a "swallowing of pride" from the party establishment to win them back.
Although UKIP does not control any councils it has emerged as a "fourth national political force capable of disrupting the hopes and plans of each of the established three parties", BBC political editor Nick Robinson said.
David Cameron rejected calls from some in his party for an electoral pact with UKIP.
Already the Conservatives and Labour are wrestling with how to react. A few eurosceptic Tories demand a pact (with UKIP). They won't get one but there will now be huge pressure on David Cameron to show how he intends to reform the EU and how he'll control the immigration that comes from it.
Ed Miliband too is under pressure - not least from Ed Balls and Yvette Cooper - to sharpen Labour's message on those same subjects - Europe and immigration.
The Lib Dems endured another bad time at the polls, although there were signs of them holding on in areas where they have MPs, such as Sutton, Eastleigh, and Cheltenham.
The party lost control of Portsmouth City Council where suspended MP Mike Hancock - standing as an independent but unopposed by the Lib Dems - lost his seat after 43 years as a councillor.
The Green Party, which is hoping to double its tally of MEPs to four in the European elections, performed moderately well in the local elections with an average 9% share of the vote in wards where it stood, adding 17 councillors.
Mayoral elections took place in four London boroughs and Watford, with Labour winning contests in Hackney and Lewisham.
Lutfur Rahman, once of Labour then George Galloway's Respect, beat Labour into second in the Tower Hamlets mayoral contest.
In Northern Ireland, counting is taking place in 11 new "super districts" councils, with 462 seats up for grabs.
All results should be known by Saturday evening but the DUP and Sinn Féin are expected to take most of the seats.
There were no local elections in either Scotland or Wales - apart from a by-election in the Hawick and Denholm ward of Scottish Borders Council.
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