A chastened and damaged Tony Blair shook up his Cabinet and a defeated Michael Howard said that he would quit as Tory leader today after a seismic general election which left none of the main players able to claim a triumph.

Mr Blair, who lost nearly 50 of his MPs, brought David Blunkett back into Cabinet as the new Work and Pensions Secretary, four and a half months after he left the Government and appointed John Reid as Defence Secretary. But the changes caused mass confusion in Whitehall with one senior official calling them a "shambles."

At one point officials were confident that Mr Blunkett would be offered part of John Prescott’s empire. Mr Prescott was reported to have opposed the move after hearing about it, and the job was never in the end offered.

It also appeared certain at one stage that Ruth Kelly, the Education Secretary, was moving to be Treasury Chief Secretary, but in the end she stayed in her current job after apparently turning down the move.

Mr Blair moved Patricia Hewitt to take over Health and Alan Johnson, the former Pensions Secretary, into her job as Trade and Industry Secretary, a post now renamed as Secretary for Productivity, Energy and Industry.

He breathed fresh life into the Cabinet by bringing in David Miliband as a new Minister of Communities and Local Government, Des Browne, the Immigration Minister, as Chief Secretary to the Treasury, and John Hutton as Cabinet Office Minister responsible for public service reform. Douglas Alexander, an ally of Gordon Brown, was appointed as the Europe Minister, reporting to the Cabinet.

Mr Blair was trying to repair his authority with changes designed to show that he was ready for a radical third term. Downing Street stressed that modernisers were in all the main public service posts. Mr Blunkett will be head of the controversial move to tighten the rules for those claiming incapacity benefit.

Mr Reid moved into his sixth Cabinet job in six years, taking over from Geoff Hoon, who becomes Leader of the Commons with Peter Hain, current Leader of the House, becoming Northern Ireland Secretary. Paul Murphy, who held that job, is standing down along with Alan Milburn and Paul Boateng, who was Chief Secretary.

Mr Blair, his Commons majority slashed from 161 to 65, promised to heed the lesson that the electorate had given him, and to introduce a far-reaching programme on schools, hospitals and law and order. He insisted that people wanted to move on from Iraq, the single issue that harmed him most in Thursday’s poll.

There was growing expectation among Labour figures that he may hand over to Gordon Brown sooner than may have been expected, with many suggesting that it could happen within a year or 18 months.

Mr Blair’s pleasure at winning an historic third consecutive term was marred by an obvious weakening in his position. Labour’s share of the vote was cut by 5 percentage points to 36 per cent, the lowest achieved by a governing party. The Conservatives scored 33 per cent and the Liberal Democrats 22.5.

In a blow for the Northern Ireland peace process, David Trimble, the leader of the Ulster Unionist Party, lost his seat to the Democratic Unionists.

Mr Howard, relieved that his party had at least advanced with a net gain of 33 seats, surprised senior Tories by saying that he was stepping aside sooner rather later. He said that, having failed to deliver the victory for which he had been working, he would go once the party had had a chance to change leadership rules which leave the final decision in the hands of party activists.

His decision was privately criticised by some Conservatives, who said that he should have held the announcement back to prevent a new leadership contest beginning immediately, as has happened after the last two general elections.

But Mr Howard said that by the next election, he would be 67 or 68 and "I believe that’s simply too old to lead a party into government".

No candidates declared their hands yet but, behind the scenes, Tory MPs were talking about a contest that seems certain to feature David Davis, Liam Fox, Sir Malcolm Rifkind and at least one candidate from the centre-left of the party.

There are likely to be attempts over the next few days to decide which contender from a number which includes: Tim Yeo, Damien Green, Andrew Lansley and Alan Duncan, is likely to win the greatest support to oppose Mr Davis.

Charles Kennedy saw the number of Liberal Democrat MPs rise to 62, the highest since 1923. He hailed the result as his party’s best for generations but admitted that it could have done better. The Lib Dems’ failure to oust no more than three Tory MPs — one of them Tim Collins, the Shadow Education Secretary — disappointed strategists although their dozen gains from Labour were welcome consolation.

The biggest backlash against Labour took place in London and the South East. Oona King was defeated by the anti-war former Labour rebel George Galloway in the London seat of Bethnal Green & Bow. Stephen Twigg, the Schools Minister, lost Enfield Southgate, the seat where his defeat of Michael Portillo in 1997 symbolised the drama of new Labour’s arrival. He was one of four ministers to perish.

Mr Blair went to see the Queen and on returning to No 10 said: "I have listened and I have learnt. And I think I have a very clear idea of what the British public expect from this Government in a third term. I, we, the Government are going to focus relentlessly now on the priorities that the people have set for us."

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