Figures from Palestinian officials tonight confirmed Hamas's shock win in the Palestinian parliamentary election over the once-dominant Fatah party.
Polls had predicted a coalition between the two parties as the most likely outcome of the vote, but a surprise surge in support for the Islamists took a party that calls for the destruction of the state of Israel into power.
The preliminary count put Hamas on 76 seats to Fatah's 43 in the 132 seat chamber. The result could complicate hopes of a peace deal between Israel and the Palestinians. George Bush said the United States would not deal with a Hamas-led government unless the party recognised Israel's right to exist.
As the scale of the Fatah defeat became apparent, its officials conceded defeat and the Palestinian prime minister, Ahmed Qureia, and his cabinet submitted their resignations. "This is the choice of the people. It should be respected," Mr Qureia told reporters.
The exit of the Qureia cabinet will change the wider politics of the region. Fatah, the party of Yasser Arafat and President Mahmoud Abbas - supports a two-state solution to the Israeli-Palestinian conflict, while the founding charter of Hamas commits it to the destruction of the Jewish state.
The Islamist faction, which is designated as a terrorist group by the US and EU, has not launched a suicide attack since February last year, but has also refused to renounce violence against Israel. Mushir al-Masri, who won a seat for Hamas in the northern Gaza Strip, insisted peace talks or recognition of Israel were not on its agenda.
Hundreds of Israeli civilians have died in nearly 60 Hamas suicide bombings.
Tonight the Hamas leader, Ismail Haniyeh, said he had called Mr Abbas to request a meeting so that they can decide on the future of the Palestinian government. "We want to meet with him to consult about the shape of the political partnership that we can achieve," Mr Haniyeh told reporters as he received well-wishers in the garden of his Gaza home. "Hamas will cooperate with everybody for the benefit of all the people."
But the poll could leave the Palestinian government without international recognition, and in Israel - where a general election is due to take place in March - it will be a key influence on the reshaping of the political terrain following Ariel Sharon's stroke.
Mr Bush said a party that advocated the destruction of Israel would never be partner for peace, but also hailed the result as an example of democracy in action.
"If there are people unhappy with the status quo they'll let you know. What was positive is that it is a wake up call to the leadership," he told a White House press conference.
"People are demanding honest government ... people want services, they want to raise their children in a decent environment."
Mr Bush said Condoleezza Rice, the US secretary of state, was holding talks with the three other members of the international quartet backing the road map peace plan - the EU, UN and Russia - to work out a response to the Hamas win.
Ehud Olmert, the acting Israeli prime minister, said Israel could not trust a Palestinian leadership in which Hamas had a role. "Israel can't accept a situation in which Hamas, in its present form as a terror group calling for the destruction of Israel, will be part of the
Palestinian Authority without disarming," Mr Olmert told the US senator Joseph Biden, according to his office. "I won't hold negotiations with a government that does not stick to its most basic obligation of fighting terror."
Deep implications could be felt in the Palestinian territories themselves. As the single biggest aid donor to the Palestinian Authority, the EU's reaction to the result will determine whether the €500m from its 25 member states and common budget continue to be sent.
Israel's acting foreign minister, Tzipi Livni, asked the EU "to sound a clear voice explaining there will be no European understanding for a process in which a terror government is being set up."
Javier Solana, the EU foreign policy chief, said in a statement that the election result had created "an entirely new situation which will need to be analysed".