Coalition leader Tony Abbott has conceded defeat following the decision of two key independents to back Labor.
Rural MPs Rob Oakeshott and Tony Windsor threw their support behind a Gillard Government, allowing Labor to form government by only one seat.
Labor has 76 seats, with the help of Greens MP Adam Bandt and independent MPs including Mr Oakeshott, Mr Windsor and Tasmanian MP Andrew Wilkie.
The Coalition, with the support of independent MP Bob Katter, has 74 seats.
Speaking at a press conference in Canberra, Mr Abbott says he was "disappointed" by the result, but felt gratified by the support he has received.
"I certainly am not going to let my disappointment blind me to the system that I respect," he says.
"For our country's sake, I hope that the Labor party can provide a better government in this term than in the last."
"It has been an amazing journey... no one thought nine months ago that the Coalition would come within a whisker of forming government."
Mr Abbott says he was not surprised by the election result, but says he think the Coalition offered more to regional and rural Australia than Labor.
Mr Abbott also says he will seek to retain the leadership, and that the Liberal party will meet later this week to vote on who will lead the party.
Deputy Liberal leader Julie Bishop has indicated she will also seek to retain her role within the Coalition.
The Liberal leader paid tribute to Nationals leader Warren Truss, and Ms Bishop.
Mr Abbott gave warm thanks to his personal staff, saying they performed "above and beyond" their duties.
He also thanked his wife and three daughters for the support they offered him during the election campaign.
"I now re-dedicate the Coalition to the task of opposition," Mr Abbott says.
"We will hold them [the government] ferociously to account."
Mr Abbott denies the Coalition will lead "a rush to the polls", saying the Australian public will not take kindly to another election so soon after the last.
But he says he will hold the government to account, and will make decisions on what's best for the nation.
"Tony has won a place in political history," Ms Bishop says.
"I would be honoured to serve as his deputy again."
