The Lib Dems held off a late surge by the eurosceptic UK Independence Party (UKIP) to win the South Coast seat of Eastleigh vacated by disgraced former minister Chris Huhne – despite the Lord Rennard scandal and slump in the opinion polls.
Its president, Tim Farron MP, said the result showed his party would avoid wipe-out and could even gain seats from the Conservatives at the next election.
He is eyeing three gains in Cornwall – meaning the Lib Dems would boast all six seats in the Duchy again – and told the Western Morning News that Newton Abbot in Devon is "high up on the list" of targets as the sitting Conservative holds a 523-vote lead.
Mr Farron said: "In the 57 seats we hold, it gives a huge boost and confidence charge that I think will also be felt in other constituencies. I'm thinking of 20 or 30 Tory-held seats in the likes of Hampshire and Cornwall and other parts of the country, that the Lib Dems might now fancy that they can gain."
Meanwhile, a senior Westcountry Conservative MP shrugged off the party finishing third behind UKIP – arguing the Lib Dem victory is a "win" for the coalition Government.
Prime Minister David Cameron could face a backbench rebellion after UKIP's strong showing in one of the Conservative top target seats needed to secure an outright majority in the 2015 general election.
Truro and Falmouth MP Sarah Newton, the Conservative Party deputy chairman, played down the significance.
Asked whether trailing UKIP was a disaster, she told the WMN: "It is not a disaster for the Conservative Party. It was a Liberal Democrat seat to hold. They are part of the coalition. It was a win for the coalition. Most people thought the Liberal Democrats would win."
UKIP leader Nigel Farage signalled Tories were deserting "Con-man Cameron" as he "talks about gay marriage, wind turbines, unlimited immigration from India" rather than traditional Conservative values.
But Mrs Newton contends UKIP took votes from all parties and the "big question" was how Labour's One Nation message failed to gain support in the south after Ed Miliband's party finished fourth.
Mr Cameron acknowledged that the result was "disappointing" for his party but insisted he was "confident" that the Tories would be able to win back the protest voters.
Totnes Conservative MP Sarah Wollaston warned against a "move to the right" in response, arguing Eastleigh was a "poor result" despite candidate Maria Hutchings being a ring-winger.
Tory rebel MP Douglas Carswell said the result showed policy changes were needed and questioned why the party was on a "long march of defeat".
The Westcountry will be a key battleground at the election given a series of key Conservative versus Lib Dem marginals.
The Conservative Party is targeting all five Lib Dem seats in Cornwall and Devon but UKIP, already the third largest party in parts of the region, could potentially split its vote.
But now the Lib Dems appear to be targeting slim Tory majorities in the Westcountry. Camborne and Redruth Tory MP George Eustice has a cushion of just 66 votes, Mrs Newton in Truro and Falmouth a majority of 435 votes, and South East Cornwall Tory Sheryll Murray a 3,220-vote lead. Mrs Murray said Eastleigh is "extremely disappointing" but the party "must exercise extreme caution in trying to make sweeping generalisations".
Yet St Ives Lib Dem MP Andrew George said the by-election showed "rumours of our demise appear to have been much exaggerated".