The outgoing premier announced he would quit as leader during his concession speech at Sydney's Hilton Hotel , stunning supporters as he declared the party needed a fresh start.
"This next period of time will not be easy, but it will be necessary," Mr Perrottet said after a Labor majority government became clear.
"It is a time to reflect. It is a time to rethink to renew.
He said he took full responsibility for the loss.
"As a result I will be standing down as parliamentary Liberal leader.
"It's very clear, we need a fresh start."
Deputy Liberal Leader Matt Kean said the party had avoided the worst-case scenario.
"We were expecting a disaster tonight, were expecting to lose everything, but we can rebuild from some of the seats," he told the ABC.
"There is a lot of soul-searching to do, but we have got something to build from."
He insisted it was too early to discuss whether he would be a leadership contender.
"No, it is too early, I haven't thought about it," he said.
"I have seen how demanding the job is. Let me tell you, Dom has put everything into this."
Former prime minister John Howard paid tribute to Mr Perrottet's heroic campaign as the Liberals prepare for opposition.
"He can be proud of giving strong, determined leadership to the party, having taken over in incredibly difficult situations," Mr Howard said at the Liberal Party reception.
A murmur rose among the sparse crowd of party faithful at the Liberal election function as election analysts called a convincing Labor win shortly after 7pm.
Two hours later Mr Perrottet called Labor Leader Chris Minns to concede.
He arrived with wife Helen by his side and heaped praise on the man he said would make a fine 47th premier of NSW, urging people to get behind him whatever their political persuasion.
"I believe he will lead with the same decency of the same integrity that he has led with so far."
One of the premier's long-term staffers said he felt dejected by the result.
"It is what it is. You can't do anything about it," he said.
Labor has seized key seats where the coalition had retiring MPs, after 12 sitting MPs quit in the lead up to the poll.
Some high profile losses include: former minister Stuart Ayres in Penrith to Labor's Karen McKeown, outgoing Health Minister Brad Hazzard lost Wakehurst to independent Michael Regan, and Ryde - which was held by retiring Customer Services Minister Victor Dominello - has also fallen to Labor's Lyndal Howison.
Earlier, a Liberal Party insider told AAP the party hoped to hold blue ribbon beachside Sydney seats, including Manly and North Shore, where it faced strong challenge independent candidates.
"The independent seats right now look like they're holding. None of them are currently, on our count, looking like they're going to get there (the independents)," he said.
Other major coalition losses included East Hills, Monaro, Parramatta, Terrigal, Holsworthy and the South Coast, with an overall 6.6 per cent swing to Labor.
Willoughby - the northern Sydney former Liberal stronghold once held by ex-premier Gladys Berejiklian with a 21 per cent margin - hangs in the balance with independent Larissa Penn challenging Tim James.
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