The elections for mayors, county chiefs and local councillors are ostensibly about domestic issues such as the COVID-19 pandemic and crime, and those elected will not have a direct say on China policy.
But Tsai had recast the election as being more than a local vote, saying the world is watching how Taiwan defends its democracy amid military tensions with China, which claims the island as its territory.
The main opposition party the Kuomintang, or KMT, was leading or claimed victory in 13 of the 21 city mayor and county chief seats up for grabs, including the capital Taipei, compared to the DPP's five, broadly in line with expectations and similar to the results of the last local elections in 2018.
"The results failed our expectations. We humbly accept the results and accept the Taiwanese people's decision," Tsai told reporters at party headquarters as she quit as party head, which she also did after 2018's poor results.
"It's not like the DPP has never failed before," Tsai, who will continue serving as president until 2024, added. "We don't have time to feel sorry. We fell, but we will stand up again."
Tsai said she had rejected a resignation offer from Premier Su Tseng-chang, also a senior DPP member, adding she had asked him to stay in office to ensure her policies would be properly implemented.
The cabinet said Su had agreed to stay due to the need for stability amid the "arduous" domestic and international situation.
China's response was muted, with the official Xinhua news agency simply noting Tsai's resignation "to take responsibility for the party's performance in Taiwan's local elections".
Both the DPP and KMT, which traditionally favours close ties with China though strongly denies being pro-Beijing, had concentrated their campaign efforts in wealthy and populous northern Taiwan, especially Taipei, whose mayor from the small Taiwan People's Party could not run again due to term limits.
The KMT has accused Tsai and the DPP of being overly confrontational with China, and of trying to besmirch the party for being "red" - a reference to the colours of the Chinese Communist Party.
It focused its campaign on criticising the government's response to the COVID-19 pandemic, especially after a surge in cases this year.
KMT Chairman Eric Chu celebrated their victory, but said they would also protect Taiwan's freedoms.
"We will insist on defending the Republic of China and protecting democracy and freedom," he told reporters, using Taiwan's official name. "We will also work hard to keep regional peace."
