Donald Trump was defeated by Senator Ted Cruz in Iowa, the first state to vote in the Republican race to choose a Presidential nominee.
Senator Cruz won the contest with 28pc compared to 24pc for Mr Trump, and 23pc for Marco Rubio, the Florida senator who performed better than expected.
At a victory rally in a cavernous hall at the Iowa State Fairground, a jubilant Mr Cruz said: “America needs new leadership.”
In a speech, he told hundreds of cheering supporters, many in “Cruz” American football shirts, it was a “victory for the grassroots”.
He said: “God Bless the great state of Iowa. The great people of Iowa have spoken. The next President of the United States will not be chosen by the media, will not be chosen by the Washington establishment, will not be chosen by the lobbyists.
“They will be chosen by the incredible, powerful force where all sovereignty resides in our nation, by we the people, the American people. Courageous conservatives have said, ‘Yes we can’.”
Mr Cruz invoked Margaret Thatcher as he promised, if he does ultimately become the Republican nominee, to defeat whoever the Democrats decide on. He claimed Mrs Clinton was also a socialist but wouldn’t admit it.
He said: “As Margaret Thatcher observed, the problem with socialism is eventually you run out of other people’s money.”
Mr Cruz also railed against the “Washington cartel” and a “corrupt class in Washington that has left the American people behind”.
The evangelical Christian had made his faith central to his campaign in Iowa and quoted the Bible to his followers.
“I want to remind you of scripture. Weeping may endure for a night but joy cometh in the morning. Iowa has made clear to America and the world that morning is coming.”
Mr Trump, who is still the front-runner for the Republican nomination in national polls, congratulated Mr Cruz and attempted to put a brave face on the result.
He said: “I’m just honoured, I’m really honoured. I was told by everybody ‘Do not go to Iowa. You couldn’t finish in the top 10’. I said I had to do it.”
The atmosphere at Mr Trump’s post-caucus rally was a mixture of anger and confusion. A crowd booed loudly as Mr Cruz appeared on large television screens around the room.
In a very brief speech Mr Trump said he would win the next state to vote, New Hampshire, where he has a 32-point lead in polls. He said: “We are going to win. I hope.”
Mr Trump added: “Iowa, we love you. You’re very special. I think I might come back here and buy a farm.”
He latter in a tweet described the loss a a “strong second.”
The billionaire whose campaign is characterised by controversial policy proposals like temporarily banning foreign Muslims from America, has been built on that he is a “winner”.
But Ron Bonjean, a Republican strategist, said: “There is now blood in the water for Donald Trump.”
Mr Rubio’s third-place finish suggested he will emerge as the favoured choice of the Republican establishment to take on the maverick candidates Mr Trump and Mr Cruz.
Mr Rubio said: “I am grateful to you, Iowa. You believed in me when others didn’t think it was possible. Tonight we have taken the first step, but an important step, towards winning this election.”