Iain McKenzie took the Westminster seat with 15,118 votes over the SNP's Anne McLaughlin on 9,280. Labour's majority fell from 14,416 at the 2010 general election to 5,838.
The Conservatives took third place with 2,784, the Liberal Democrats polled 627 votes and UKIP was fifth with 288.
The by-election was held after the death of David Cairns in May, aged 44.
'Enormously humbled'The turnout for the by-election was 45.53%, down more than 17% compared with the 2010 General Election.
In his victory speech, Mr McKenzie said: "First can I say this is an election none of us wanted.
"We would have much preferred that our dear friend, and widely respected MP David Cairns was still among us and still selflessly serving the people of Inverclyde as he did for 10 years before he was tragically taken from us.
Continue reading the main story Jamie McIvor BBC Scotland local government correspondentThis could have been a night of catastrophe for Labour. Both Labour and the SNP were sure this would be a tight result decided by just a few hundred votes.
Even a narrow Labour victory in what would normally be considered an ultra safe seat would, by any reckoning, still have been a disaster for the party.
Unsurprisingly, activists were tense as they arrived at the count. Spin doctors were at work trying to manage journalists' expectations.
Nationalists were tense too. But for them, the question was whether they would actually clinch the seat. Substantially reducing Labour's majority and share of the vote would still be cause for celebration.
A few London-based journalists had joined the Scottish media in the expectation of a political earthquake - another by-election shock of the scale of the SNP's victory in Glasgow East three years ago.
But once a few ballot boxes were opened, the mood began to shift. It started to become clear Labour looked like winning. "Labour Hold Safe Seat Shock" is hardly a killer headline.
The question soon was about how close the SNP would come. Liberal Democrats started to concede that it looked as though they had come fourth and lost their deposit.
As the votes started to pile up it became clear Labour was heading for victory. When candidate Iain McKenzie arrived at the count just after midnight, Labour activists cheered as if victory was already theirs.
Labour's safe majority was greater than many activists dared to imagine. It was a shot in the arm for activists, still demoralised after the Scottish election result two months ago.
Meanwhile the SNP could satisfy themselves that they had cut Labour's majority substantially but for activists who sincerely believed they had every chance of taking the seat - or at least taking the result to a knife-edge - this was still a disappointment.
"We have to manage our activists' expectations," reflected one senior nationalist. "We've got too used to winning. We can't win all the time."
"Can I say I'm enormously humbled to be elected to succeed David, and continue his work, standing up for our communities, fighting for fairness and opportunities for our people."Mr McKenzie said it had been a "good night for Inverclyde and a good night for Labour too".
"I'm proud to be part of the Labour Party, renewing itself under the leadership of Ed Miliband, listening more, working harder and challenging for better, to get back in touch with those we seek to serve," he said.
"And I'm proud that my community of Inverclyde has [taken] an important step in Labour's mission to win back the trust of the people both here in Scotland and south of the border.
"Remember, only weeks ago the SNP came within 511 votes of winning here, but tonight the voters of Inverclyde have rejected them - this time giving myself and the Scottish Labour Party not a 500 majority, but over 5,000 of a majority.
"Labour's fightback has started right here in Inverclyde - my hometown."
Speaking after the result, Ms McLaughlin said: "We have cut Labour's majority by more than half which I am thrilled about.
"The reason I'm thrilled is that I met so many people who said they had voted Labour all their lives, but they were motivated by how well they felt the SNP government was doing, how well we did in the last elections and by the campaign that we've run here in Inverclyde, to vote SNP for the first time.
"Obviously for us to cut their majority by so much, several thousand people voted SNP no doubt for the first time, so I'm really pleased that so many people took that step and will continue to vote for us."
The Scottish Conservative candidate, David Wilson, said: "Given that we started in fourth and that the media told the electorate that this was a two-horse race, we faced an enormous squeeze but we can hold our heads high.
"We have secured a clear and credible third place in an area that has little tradition of voting Conservative. The result is not of a scale which backs up Ed Miliband's alleged fightback, and is a slap in the face for Alex Salmond.
"The SNP had spent the last two months engaged in an anti-British rant of grudge and gripe. Alex Salmond had been here seven times, but by two to one the voters of Inverclyde have rejected Alex Salmond's separatist agenda."
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