Despite weeks of effort, the smell of defeat was in the air – the latest hammer blow to a party that once enjoyed hegemony in Scotland.

Once upon a time failure was not even contemplated. Now it has become the norm.

Leaderless in Scotland and with an unpopular Prime Minister in London, the party now faces the challenge of renewing itself north and south of the Border, while coping with the twin threats of the SNP and the resurgent Tories.

A senior Labour MSP told The Scotsman: "We all have egg on our faces. None of us saw Glasgow East coming and we really don't know how we are going to pick ourselves up from here. There is no obvious new leader, but somehow we have to take the fight to the SNP."

In just three weeks the party in Holyrood has "lost" two of its big hitters. First, Wendy Alexander resigned as leader, finally capitulating to a constant stream of bad press over donations to her leadership campaign. Now Margaret Curran, who was being touted as a potential replacement leader, lost the Glasgow East by-election and will be forever tainted by the defeat, even though many people were impressed with her campaign.

The frontrunner to replace Ms Alexander, Andy Kerr, formerly the health minister, looks almost certain not to put his name forward. Many people think he is the only Labour MSP who could take the fight to the SNP.

Ken McIntosh, Labour's education spokesman, has announced his intention to stand, but soundings taken by The Scotsman suggest that he will not find six MSPs to nominate him. The same is likely to be true of former Glasgow City Council leader Charlie Gordon, who stepped down as transport spokesman after receiving an illegal donation for Ms Alexander's leadership campaign.

That leaves just the current deputy leader, Cathy Jamieson, who most see as a stop-gap candidate to limit the damage before somebody else can be found, or finance spokesman Iain Gray, who is supposedly Gordon Brown's preference.

The SNP has already started briefing that it would prefer to have Mr Gray in charge.

"Not so much Gray as grey," a source close to Alex Salmond said.

But perhaps the biggest challenge will be ensuring that Labour grassroots activists continue to give their time.

What Glasgow East revealed was an SNP machine that was well oiled and motivated from top to bottom. Without that, Labour will be in the doldrums for some time yet.