Australia's ruling coalition forced into minority government

Dr Phelps was tentatively named as the frontrunner in Saturday’s election. Source AAPMore

Australia's embattled conservative coalition was dealt a spectacular defeat Saturday in a crucial by-election two months after it turfed out its latest prime minister, sending it into a minority government.

Independent candidate Kerryn Phelps will be sworn in as the next member for Wentworth, ending decades of Liberal dominance in the affluent Sydney harbourside seat.

The emails reported on the ABC said Phelps had been diagnosed with HIV on Tuesday and that voters should now divert their vote to the Liberal candidate, Dave Sharma.

Prime Minister Scott Morrison has admitted the Liberal Party is likely to lose the Wentworth by-election following community anger over Malcolm Turnbull's axing.

"It was said if we won the seat of Wentworth, it would make history", Dr Phelps told a crowd of cheering supporters.

Kerryn Phelps, the leading independent candidate in the Wentworth byelection, has become the target of smear campaign in which emails have been sent to various organisations alleging she has HIV and has pulled out of the race. "The Liberal Party has paid a big price tonight for the events of several months ago".

However he said the party would "rise again" because it had people like Mr Sharma in its ranks.

Labor did not capitalise on the Liberal Party vote collapse: one hour after polls closed, the Greens' Dominic Wy Kanak was besting the opposition party's Tim Murray on the primary vote.

Voting is compulsory in Australia but the buzz around the polling stations was unusual for Wentworth, with dozens of volunteers from different parties inundating voters with leaflets for their candidates earlier Saturday after polls opened.

It is the first time since Federation that the blue-ribbon electorate has changed hands from the Liberal Party or its predecessors. "It's quite extraordinary the level of interest in the election this time around".

"This shows the values of Scott Morrison are not the values of Wentworth", she said.

'There has been high expectations that this is a seat that can not be lost by the Liberal Party - I have never thought that'.

"None of them have really got their mind on the job".

The sprawling Sydney constituency takes in the famous beach, as well as the haunts of stars like Russell Crowe and Hugh Jackman.

A defiant Mr Morrison told a Liberal function the result was "not unexpected" however he did not have a "vanquished spirit".

The by-election where 13% of voters are Jewish drew global attention after Morrison proposed Australia could follow US President Donald Trump's controversial decision last December by recognising Jerusalem as Israel's capital and moving its embassy there.

The Palestinian Authority delegation to Australia had lambasted Morrison's announcement as "deeply disturbing".

Arab diplomats expressed their worries to Canberra this week, and neighbouring Indonesia, the country with the biggest Muslim population, warned that Australia was risking its trade and business relationship with the entire Islamic world.

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