Mr Rumsfeld, 74, served as the United States' youngest Defence Secretary under President Ford in the 1970s and was brought back to head up the Pentagon when Mr Bush started his first term in 2001.

He has been widely criticised for his handling of the Iraq war, especially the failure to plan properly for the reconstruction of Iraq and for the decision to disband the Iraqi armed forces.

Mr Bush's decision to sacrifice him - only hours after his resignation was demanded by Nancy Pelosi, the California Democrat set to become the first female speaker of the House - signalled a desire to work with the Democrat-dominated Congress to avoid becoming a lame-duck president in his final two years in office.

After reports that the Democrats had won Montana, giving them 50 of the 100 Senate seats, all eyes were on Virginia. There is every sign of a prolonged recount which could mean that the balance of power in the upper chamber will not be determined for days, and perhaps weeks.

With 99.8 per cent of votes counted, Jim Webb, the Democrat challenger, had a lead of less than 7,000. He declared victory early yesterday but George Allen, the Republican incumbent, shows no signs of conceding. Under Virginia law, a recount cannot begin until the preliminary vote tally is registered on November 27.

The Democrats rode a wave of voter anger against Mr Bush, the Iraq war and successive Congressional scandals as they picked up seats, first down the East Coast and then through the heart of what has over recent years been Republican territory in the American Midwest, across the Great Plains and into the south-west.

By this morning, Democrats had picked up 30 seats in the House, far more than the net gain of 15 they had needed to retake it, with several races still too close to call. They appeared to have picked up five seats in the Senate, with Jon Tester, the Democrat challenger in Montana, reported tonight to have beaten the Republican incumbent Conrad Burns.

The most expensive - and arguably the nastiest - midterm election in US history shuddered through its final hours with result after result showing voters had turned cold on both the President and a dozen years of Republican hegemony on Capitol Hill.

As votes were counted in Congressional districts covered by eastern time zones, the Democrats seized at least a score of seats, and by 10pm - just three hours after the first polls closed - they had retaken the House.

Ms Pelosi told a wildly enthusiastic rally in Washington last night: "Tonight is a great victory for the American people. From sea to shining sea, the American people voted for change."

She promised Democrats would run the most honest Congress in history, then raised both the man and the issue which had dominated this campaign, saying: "Mr President, we need a new direction in Iraq."

Mr Bush monitored the results from the White House, knowing that a Democratic congress is likely to hobble his final two years in office. After being told by his senior adviser, Karl Rove, that the Republicans had lost control of the House, he made arrangements to speak with Ms Pelosi in the morning.

"They have not gone the way he would have liked," Tony Snow, the White House Press Secretary, said of the election returns. "Democrats have spent a lot of time complaining about what the president has done. This is an opportunity for them to kind of stand up."

Tom DeLay, the former Republican House leader who resigned last year amid ethics problems, said: "We took a whipping last night."

The Republican Senator John McCain, one of the frontrunners for the next presidential race, promised: "We will re-group as we have in the past. I believe that most of America still shares our conservative philosophy."

But Harry Reid, the leader of Democrats in the Senate told the victory rally: "All across America tonight they have come to the conclusion we did some time ago - that a one-party town simply does not work."

News organisations made swift calls on three crucial Senate races - Rhode Island, Pennsylvania and Ohio - declaring them all Democrat gains. Missouri, one of the other three seats which Democrats must win to retake the Senate, was narrowly won by Claire McCaskill, the Democrat challenger who unseated Jim Talent in one of the closest races of the night.

At the same time the Democrats also held two potentially vulnerable Senate seats in New Jersey and Maryland.

In Connecticut, Joe Lieberman who lost the Democratic primary in August and subsequently stood as an independent was comfortably re-elected. He will take the Democrat whip when he returns to the Senate but his pro-war views and possibly pivotal position in an almost evenly split chamber will give him huge leverage over the party which abandoned him just three months ago.

That left the attention of the nation focusing on Virginia. The margin of victory for either Mr Webb or Mr Allen is certain to be substantially less than the 25,000 votes cast for Gail Parker, the Green Party candidate, who last week said she had been considering withdrawing from the race.

A recount is virtually certain in Virginia with Mr Allen telling supporters in the small hours of the morning that they should be patient, saying: "We know that the counting will continue through the night, through tomorrow."

His rally had the atmosphere of a wake for a man once thought of as a likely presidential candidate.

Earlier the Democrats had received a boost from exit polls. These showed 58 per cent of those surveyed disapproved of Mr Bush, while a similar proportion were opposed to the Iraq war. The polls also showed Democrats were winning the support of independents by a margin of almost two-to-one - and middle-class voters were leaving Republicans behind.

Despite Republicans efforts to focus voters' attention away from Iraq and Congressional scandals, the exit polls suggested 62 per cent of those voting yesterday had been motivated by national - rather than local - issues.

A Democratic majority in even one chamber could block Mr Bush's legislative agenda and turn up the pressure on the White House for a dramatic shift in strategy on Iraq. It also would give Democrats control of legislative committees that could investigate the Bush administration's most controversial decisions on foreign, military and energy policy.

US news networks were reluctant to predict the results of races too early, having had their fingers badly burnt in the last two presidential contests.

But CBS gave the Senate race in Ohio to Democrat challenger Sherrod Brown over the Republican incumbent Mike DeWine.

ABC declared Rick Santorum, the fourth ranking Republican in the Senate, had lost to the Democrats' Bob Casey. At the same time NBC called the New Jersey race, where the Republicans had hoped to buck the trend and win, in favour of the Democrat incumbent Bob Menendez.

The first proper election results showed resurgent Democrats winning governorship races in Ohio - where Ted Strickland defeated Republican Ken Blackwell with ease to become the state's first Democratic governor in 16 years - and in Massachusetts where Deval Patrick triumphed over Republican Kerry Healey and will become the state's first black chief executive.

Democrats later won the governorships of New York, Colorado, Maryland and Arkansas from the Republicans as well.

In Indiana, Pennsylvania, Ohio and Connecticut, Democrats defeated a swathe of vulnerable Republican Congressmen. All three Indiana Republicans regarded as being most at risk - Chris Chicola, John Hostettler and Mike Sodrel - fell to the Democrat opponents.

The Republican Congresswoman Anne Northup in neighbouring Kentucky, who has survived tough re-election challenges before, was also beaten by Democratic challenger John Yarmuth.

In Pennsylvania, Curt Weldon - a ten-term veteran - and Don Sherwood, both of whom have been touched by scandal in recent months, were also slung out of Congress. In the Florida seat once occupied by Mark Foley, the Republican who sent sexually-charged computer message to teenage male interns, was gained by the Democrats by a narrow margin.

According to the independent Centre for Responsive Politics, at least $2.8 billion (£1.5 billion) will have been spent by both parties and their allied groups, 20 per cent higher than the previous record.

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