Labor's victory ends more than a decade of conservative government under John Howard.
The 68-year-old former solicitor became Prime Minister in 1996 and had been seeking a fifth consecutive term in office.
Mr. Howard formally conceded defeat before supporters at a hotel in Sydney.
"A few minutes ago I telephoned Mr. Rudd and I congratulated him and the Australian Labor Party on a very emphatic victory," he said. "This is great democracy and I want to wish Mr. Rudd well. He assumes the mantle of the 26th prime minister of Australia and I want to say that there is no prouder job a man can occupy than being the prime minister of this country."
Labor leader Kevin Rudd has promised voters energetic and responsible leadership.
Mr. Rudd insisted the Howard government had become complacent and lazy.
The former diplomat has positioned himself as an economic conservative who - unlike Mr. Howard - would ratify the Kyoto Protocol on climate change and bring Australian troops home from Iraq.
But is was domestic concerns that dominated the campaign. The economy was the central issue. Mr. Rudd has convinced voters he has the expertise to ensure the country's economic prosperity continues, despite Mr. Howard's claims Labor would be too inexperienced to do so.
Climate change, education and health care were also key issues in this election.
Mr. Rudd has brought to an end John Howard's decade-long domination of Australian politics - an era that has been characterized by the conservative leader's close friendship to U.S. President George Bush, strong economic growth and an uncompromising approach to immigration and border security.
John Howard became Australia's second-longest serving prime minister. He now faces the prospect of more losses at the polls - including the possible loss of his own parliamentary seat. If he does he will be the first leader to do so since 1929. - VOA News