The East Lothian MSP easily beat his main rival for the job, Cathy Jamieson, after the third candidate, Andy Kerr, had dropped out of the running.

He issued an immediate call for unity in the party in Scotland, following a year in which it first lost power at Holyrood and then saw Alexander resigning in a row over her campaign donations.

Gray used his acceptance speech to lay out plans to reform the council tax and said he supported moves to hand out prison sentences for anyone caught in possession of a knife.

But opponents immediately cast him as "Mr Three Percent", referring to the number of people recently polled who thought he would make the best First Minister.

Gray had been the bookies' favourite for the job but the margin of victory surprised many observers, with the enterprise spokesman winning the largest number of votes from both elected Labour Party members and grass-roots party workers.

Only among union members was Jamieson marginally more popular. Meanwhile, Kerr, who used the campaign to demand that the role of the leader be upgraded, was heavily defeated.

The complicated voting process saw more than 200,000 party members, elected members and union members being asked to rank candidates in order of preference. Gray was the favoured candidate of 46%, Jamieson won 33% and Kerr 20%.

As the candidate with the least number of votes, Kerr was then eliminated, with the second preferences of those who voted for him added to Gray and Jamieson's scores. The final result showed that Gray won 58% of the vote, against Jamieson's 42%.

In his acceptance speech, Gray declared: "This election is the beginning of a new conviction in Scottish Labour, united around our shared values and moving forward with common purpose. Labour is best when we look outwards and align our values with the people's aspirations. Not just listening but hearing."

He told the activists: "It is time to close the manifesto on which we fought the 2007 election and to begin to write our programme for Scotland in 2011."

He added: "We don't need a First Minister whose pride is putting people down. Scotland needs a first minister whose passion is lifting people up."

Speaking afterwards, Gray reiterated that the margin of his victory and the election itself had shown he had a "mandate" to speak for Labour in Scotland. His leadership rival, Kerr, had insisted that the position should be credited with more power to reflect its high profile. But Gray insisted: "The big message I have tried to get across is that the most important thing is the unity of the party."

Gray said that among his priorities as Labour leader would be plans to take forward a Literacy Commission to boost reading and writing skills in primary schools. He is also expected to propose major reforms to the council tax.

Pressed on whether Gray was now the de-facto leader in Scotland, Scottish Secretary Des Browne said: "He is entitled to take that view but Iain respects the structure of the party".

The SNP congratulated Gray on his success but pointed to recent polling on who Scots thought would make a good First Minister. Alex Salmond polled 41%, while Gray scored just 3%.

SNP deputy leader Nicola Sturgeon said: "Labour's low key election contest generated hardly any interest, and has been totally overshadowed by Labour's civil war at UK level."

Lib Dem leader Tavish Scott said: "I congratulate Iain Gray on his election. However, I fear that the messenger is not the problem with Labour. The country has got sick of the message."

Scots Tory leader Annabel Goldie said: "Iain Gray finds himself in charge of a party which has hit the buffers north and south of the border. Labour is neither fit for purpose as an opposition at Holyrood nor Government at Westminster."

At the same time, Glasgow MSP Johann Lamont was elected as the party's deputy leader, beating fellow MSP Bill Butler by 60.18% to 39.82%.

Labour revealed that 58% of its 18,000 members voted in the poll and 96% of MEPs and MSPs and MPs had turned out.

Name belies a colourful past

Iain Gray will be a blank page for many Scots waking up today. But this is the man who is currently one parliamentary seat away from being Scotland's First Minister.

The 51-year-old former teacher, who grew up in Edinburgh and Inverness, led a colourful life prior to politics which belies both his name and image. In the '70s, he spent two years working in a school in Mozambique in the midst of a civil war. On returning he joined Oxfam, where he witnessed some of the world's gravest crises.

His political career has been chequered. He gained a reputation as competent minister under Henry McLeish and Jack McConnell's administrations. But he then promptly lost his Edinburgh Pentlands seat in 2003. Others warn that Gray does not have the kind of charisma required of a politician in a TV age.

Allies point to his conviction and his resolve as his strengths. Leading a party with its morale in its shoes, he is about to have those attributes tested in the extreme.