Mary Doyle unexpectedly won the eastern Melbourne seat of Aston on Saturday, the first time a government has won a seat from the opposition at a by-election.
Ms Doyle promised to hit the ground running.
"I promise to every single one of you, whether you voted for me or not, I will always listen," she said on Sunday.
"I will always do the best I can for this area and I will always put locals first."
Prime Minister Anthony Albanese said Ms Doyle would make a difference to her local community.
"Mary Doyle's compassion, dignity and just common decency really shone through during the campaign," he said, standing alongside his newest caucus member.
Mr Albanese said Australians had conflict fatigue and wanted the government to get things done, as he kicked into Opposition Leader Peter Dutton, accusing him of being obstructionist.
"Just as he is saying no to all of the policies that are being put forward, Australians said no to him and the people of Aston said no to him," he said.
Mr Dutton vowed the Liberals will come together and rebuild as the party faces serious soul-searching.
The party's candidate for Aston, Roshena Campbell, conceded defeat on Saturday night with Labor predicted to take the seat with a swing of more than six per cent.
Fronting the party faithful alongside Ms Campbell, Mr Dutton acknowledged it was a "tough night" for the Liberals, but said it wasn't the party's first.
The Liberals would listen to the people of Aston and grow stronger from the result, he said.
"We will work toward the next election to make sure that we're in a much better and stronger position by the time of the next general election," Mr Dutton said.
"We gather together now, we rebuild, and I promise you we will never give in."
Labor minister Ed Husic said traditional Liberal voters had abandoned the party because of their negativity in opposition.
"The Liberal Party need a period of reflection and to think whether or not the approach they have always had once they go into opposition - the Tony Abbott approach to saying no to everything - is the way to go," he told Sky News' Sunday Agenda program.
But Mr Husic said the historic result was no guarantee Labor would clean up at the next federal election - which could be called as early as the end of 2024.
The by-election was widely considered to be a test of Mr Dutton's leadership, although political watchers expected the Liberals to retain the seat in line with historical trends.
Ms Doyle, a breast cancer survivor and former unionist who failed to take the seat at the last election, said even the most "optimistic true believers" had her pitted as the underdog in the Aston campaign.
"We were the underdog but boy, have we shown that we have a big bite," she told the party faithful.
The newly elected NSW premier said the win was a huge endorsement of Mr Albanese's leadership.
"It's probably more a reflection of the federal government doing well," Chris Minns told Sky News on Sunday.
"Getting a mid-term report card from the people of Australia that they like the direction of the Albanese government and they want to see more of it."
Aston was held by the Liberals on a 2.8 per cent margin after former minister and outgoing member Alan Tudge suffered a large swing against him at the 2022 election.
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