Australia—Prime Minister Julia Gillard held off a leadership challenge from rival Kevin Rudd on Monday, setting the stage for a bid to reunite her divided party and win back disenchanted voters.
"I can assure you that this political drama is over," said Ms. Gillard in a news conference following the poll, in which she garnered 71 of 102 votes. "I absolutely believe that united we can win the next election."
Ms. Gillard has come under attack from Tony Abbott, the leader of the Liberal party and Liberal-National coalition, who has picked up on Mr. Rudd's campaign pitch that Ms. Gillard isn't capable of defeating him in a general election.
Mr. Rudd, a 54-year-old former diplomat, triggered the political crisis when he resigned as foreign minister last week and openly challenged Ms. Gillard's leadership. He fought his campaign on the view that he is the best person to reverse the commanding lead Mr. Abbott's party enjoys in opinion polls.
Mr. Rudd's continued presence in Canberra will be a further destabilizing force within the Labor party, although he stressed following his defeat that he will back Ms. Gillard in a future election.
In a campaign that will began in earnest on Monday, Mr. Abbott, 54, targeted independent lawmakers who support Ms. Gillard's administration in an effort to force a no-confidence vote in Parliament and an early general election ahead of the next scheduled ballot in late 2013.
Ms. Gillard's government is held hostage by its necessary but volatile alliance with a few independent lawmakers and the increasingly influential Greens party, which has given its support in exchange for policies like a tax on carbon emissions and profit of mining companies.
"I have no confidence in this prime minister" said Mr. Abbott after the results of the Labor vote. "I formally request the independents to state their position on whether they have confidence in this prime minister, given the devastating critique of this prime minister that we've seen from her own colleagues."
A government led by Mr. Abbott would attempt to reverse much of Ms. Gillard's legislation, such as the emissions and mining taxes, along with a plan to build a high-speed broadband network at a cost of about US$36 billion.
"The markets already have a very dim view of this government," said Tim Hannon, chief investment officer at Sydney-based hedge fund Evergreen Capital. "This just adds to the view of sovereign risk in Australia."
Mr. Hannon said Labor's legislation on taxing carbon emissions and mining profits are among the most onerous for business. Australia's economy has done better than most under Ms. Gillard, with growth last year of about 3% and near full employment, but her government has failed to capitalize.
Mr. Rudd has said he will withdraw from front-line politics and not challenge Ms. Gillard again, but he could reignite his bitter feud with the prime minister if she fails to reverse a steep decline in the ruling Labor party's popularity. Monday's vote is unlikely to quell the tension within the party or sate Mr. Rudd's ambition to regain the leadership he lost in June 2010.
"There is a possibility he could have another shot," said Michael Wesley, executive director of the Lowy Institute, an independent political think tank based in Sydney. "Rudd has claimed the moral high ground out of this and you can't rule him out because he is popular with the public."
Ms. Gillard, a 50-year-old former industrial-relations attorney, and her senior supporters fought an acrimonious campaign to discredit their rival. A leading ally, Treasurer Wayne Swan, criticized Mr. Rudd for "dysfunctional decision making."
Mr. Rudd pitched his leadership challenge on his popularity with voters, spending the weekend campaigning at shopping malls in his native Queensland state and calling on voters to pressure their members of Parliament to support him.
Ms. Gillard gained power in mid-2010 following Labor's ouster of Mr. Rudd. Her supporters have used his challenge to criticize his leadership and management style. But political experts warn that the nature of Mr. Rudd's campaign, which gained the support of five senior ministers, including Labor tactician Anthony Albanese, means Ms. Gillard will struggle to heal the wounds within her office.
Attention will now turn to the shape of Ms. Gillard's new cabinet and whether Mr. Rudd will keep his commitment to not challenge her leadership again.
"She will want the right ministers in the right portfolio and people who can get out and sell the government," said John Wanna, a professor of political science at Australian National University in Canberra.
John McTernan, Ms. Gillard's communications director and former strategist for Tony Blair, didn't return messages seeking comment.
Mr. Wanna warned that she could face another leadership challenge within six months unless she significantly improves Labor's popularity in the polls.
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