'As is obvious to all, tonight has not been our night,' Mrs Clark told upset supporters in Auckland.
'I congratulate John Key and the National Party on the result they have achieved.'
She said New Zealanders were fortunate to live in a democracy where people had the right to choose their government.
'Their choice tonight has not been us, but I respect the choice that has been made, and I accept responsibility for the result,' Mrs Clark said.
Mr Key, a multi-millionaire former investment banker, will lead a National Party-led government after a big swing against Labour in Saturday's election.
Preliminary Electoral Office figures showed his centre-right National Party won 45.5 per cent of the vote or 59 seats in a 122 seat parliament.
The allied right-wing ACT Party under Rodney Hide won five seats and United Future's Peter Dunne added another.
Mrs Clark stunned supporters when she told them she would step down as leader of the party after 15 years.
'My job as leader of the Labour Party is complete. I will be standing down and I will be expecting my Labour Party colleagues to elect a new leader before Christmas.'
Some of Mrs Clark's supporters cried out 'no' after she announced her retirement.
Later, the member of parliament of 27 years indicated she would keep her seat, saying she would have more time to devote to the people of her electorate.
The one-time student anti-Vietnam war activist said she was proud to have led a party which promoted the values of fairness, opportunity and security.
'I utter one fear, and that is that I do hope that all we have worked to put in place doesn't go up in flames in a bonfire created by the right wing of politics,' she said.
Mrs Clark took over the leadership of Labour at a time of bitter divisions in the party after it was dumped at the 1990 polls following the introduction of right-wing economic reforms under former finance minister Roger Douglas.
Mr Douglas returned to parliament for the first time in 18 years after he was elected Saturday as a legislator for the ACT party he helped found.
'It became my job in 1993 to lead Labour back to electoral respectability and into government and I've been proud to do that,' Mrs Clark said.
'I'll be looking back at these last nine years with an incredible amount of pride.'
She said the desire for change after nine years of a Labour-led government was the main reason for the election loss.
'There's always a certain 'time for a change' factor and that took us out with the tide. But as I say, I've seen tides come in and I've seen them go out.' -- AFP