Robert Jenrick saw off the threat from Nigel Farage's eurosceptics but his party's majority was more than halved from 16,152 to just 7403.
Ukip pushed Labour into third place but the Liberal Democrats were again humiliated, coming sixth behind the Greens and an independent, the LibDem candidate losing his deposit.
Danny Alexander, the LibDem Treasury Chief Secretary, blamed tactical voting to stop the anti-EU Ukip for his party's poor showing, describing the result as "very disappointing".
The LibDems have won less than 5 per cent of the vote in nine by-elections since 2010. After the Newark result, the leadership faced calls for a review of its campaign strategy.
George Osborne said the Tory victory at the by-election - caused by the resignation of Newark's former Conservative MP Patrick Mercer, who quit over a cash-for-questions scandal - was a "big team effort". Every Conservative Cabinet minister had visited to the town to campaign, with the Prime Minister going four times.
"It was a strong win for the Conservatives, a strong endorsement of the economic plan which is turning Britain around. That is precisely the argument we will now take to the General Election in less than a year's time," said the Chancellor.
Mr Cameron insisted it was a "very good result" for the Tories; the party's first by-election victory while in government for more than 20 years. But he made clear his party had to work around the clock between now and May 2015 to win voters' confidence. Ukip increased its share of the vote by 22 per cent on a swing from the Tories of 15 per cent.