Such an outcome would be a damning verdict on Brown's first year in power since taking over from Tony Blair and the poor showing could raise doubts about his leadership, analysts said.
But ministers said the results were a reflection of a downturn in the economy caused by the worldwide credit crunch and Brown would bounce back and win the next national election.
"There's no crisis. This isn't something that's going to affect the fundamental stability of the government," Cabinet minister Geoff Hoon told BBC TV.
Governments in Britain traditionally suffer a bloody nose in mid-term polls and Brown does not have to call a parliamentary election until 2010, by which time he will be hoping the economic picture will have improved.
Some 4,000 seats on 160 councils across England and Wales were up for grabs in Thursday's elections. With 88 councils having reported results, Labour had lost 109 seats while the Conservatives had gained 122.
Labour Party did badly at the last such local elections in 2004, when public anger was running high over Britain's backing for the United States in the Iraq war.
The BBC projected that the Conservatives' share of the vote was 44 percent with Labour on 24 percent, in third place behind Britain's third party the Liberal Democrats.
"Worst Drubbing For 30 Years"
Newspapers said Brown had been punished by angry voters. "Brown heads for an election mauling," the Daily Telegraph said on its website. The Times said Conservative leader David Cameron had inflicted Labour's "worst drubbing in 30 years".
Attention will now be fixed on London where two political mavericks are battling for the job of mayor in the closest election since the office was created eight years ago.
Victory for Conservative candidate Boris Johnson in the race to be mayor of London would be a major boost for Cameron, who will try to end a Labour run of three successive triumphs at the next national parliamentary election.
A win for incumbent Ken Livingstone in the London race, which will be announced later on Friday, would provide some relief for Brown whose popularity has plunged in recent months along with his reputation for economic management.
Brown enjoyed a brief honeymoon with voters after taking over from Tony Blair in June.
But the media and opposition accused him of dithering over calling a snap election in October -- a move he eventually decided against -- and he has also been beset by party in-fighting, economic turmoil and industrial unrest.
Brown acknowledged this week he had made mistakes over tax reform. A party revolt had forced him to make concessions to prevent people on low incomes being hurt by the changes. And a poll this week gave the Conservatives a huge 14-point lead.
Former minister Charles Clarke, a critic of Brown, suggested that a ministerial re-shuffle was required.
"We have to get the team which is right," he told BBC TV. "These are a real message to us from the electorate saying we don't like some of the things we've seen, you've got to get your act together."