A resounding Democrat victory in Tuesday's mid-term elections put the party in charge of the House for the first time since 1994 while control of the Senate rest on the result of races in two states.
The Republican drubbing means Bush will face new scrutiny over Iraq while he now faces a difficult two final years in the White House.
"The American people have spoken and they have demanded change," said Senate Democratic leader Harry Reid.
"They want, they deserve, and they are going to get a new direction -- at home and in Iraq," Reid said.
"This is a wakeup call for the Republican party," said a humbled Republican Senator John McCain, a likely candidate to replace Bush in 2008.
Piling up a comfortable majority in the 435-seat House, Democrats beat most predictions picking up nearly 30 seats.
In the Senate they added three Republican scalps and were awaiting the results of tight races in Virginia and Montana that could give them the upper house.
The Democrats' candidate was ahead in Montana and they claimed victory in Virginia, though a possible recount there meant a final result may take several days.
Party leaders quickly demanded a new direction in the blood-stained US occupation in Iraq.
Nancy Pelosi, who is set to become the first ever female speaker of the House, said the election proved Americans were sick of Bush's policies on Iraq, where more than 2,800 US troops have been killed.
"We cannot continue down this catastrophic path. And so, we say to the President, 'Mr. President, we need a new direction in Iraq,'" Pelosi told supporters.
Her House colleague Rahm Emmanuel, who masterminded the win, added: "What we're doing in Iraq isn't working and we desperately need to change course."
Republican House majority leader John Boehner said his party was "deeply disappointed" and predicted his colleagues would reflect on the result, and return to a majority in 2008.
Bush watched from the White House as his Republican Party's monopoly on power was shattered. He called a White House news conference for Wednesday.
"We believe Democrats will have control of the House, and look forward to working with Democratic leaders on the issues that remain foremost on the agenda, including winning the war in Iraq and the broader war on terror and keeping the economy on a growth path," said White House spokesman Tony Snow.
Voters piled on anger over the course of the war in Iraq and a heap of corruption and moral values scandals which have tainted the Republicans in the past two years, exit polls suggested.
They also expressed concern over skyrocketing health-care costs, "values" issues like stem-cell research, gay marriage and abortion, the economy and illegal immigration.
Such issues sent Republican incumbents crashing to defeat in Arizona, Connecticut, Florida, Indiana, Iowa, Kansas, Kentucky, Minnesota, Missouri, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, Rhode Island and Texas, according to television projections.
On a banner night for Democrats, the party also won six governors' seats to take the majority of state houses for the first time in 12 years. Hollywood star Arnold Schwarzenegger, a Republican, bucked the trend and was re-elected hovernor of California, crushing Democrat rival Phil Angelides.
Democrat Keith Ellison from Minnesota became the first Muslim elected to Congress, and Hillary Clinton easily beat her Republican rival to claim a second term in the Senate, further spurring expectations of a 2008 presidential run.
"We believe in our country and we're going to take it back, starting tonight!" the former First Lady told supporters in New York. "New Yorkers and Americans ... want a new beginning for our beloved country."
In the Virginia Senate race, Democrat Jim Webb led incumbent Senator George Allen by a few thousand votes with a recount and prolonged wrangling between lawyers likely.
Democratic challenger Claire McCaskill toppled Republican incumbent Senator Jim Talent in Missouri and in another important race in Montana, Republican Senator Conrad Burns trailed his challenger with two-thirds of precincts in.
But Republicans clung onto a hotly-contested Senate seat in Tennessee after a race which enflamed racial tensions.
In the Senate, conservative Senator Rick Santorum lost in Pennsylvania, and fellow Republicans Mike DeWine and Lincoln Chafee lost in Ohio and Rhode Island respectively.
Democrats retained at-risk seats in New Jersey and Maryland.
There were sporadic problems with electronic voting machines, and both sides hurled accusations of voter fraud.

Copyright AFP (Agence France-Presse), 2006