Lugar conceded defeat to challenger Indiana state Treasurer Richard Mourdock, who attacked the soft-spoken Senator for votes in support of Democratic President Barack Obama.
"My public service is not concluded," Lugar told supporters in Indianapolis. "I look forward to what can be achieved in the Senate in the next eight months despite a very difficult national election atmosphere."
The defeat of Lugar gives a boost to the Tea Party movement, which wants to force deep cuts in government spending and reduce the size of the federal government.
The outcome also gives Democrats an unexpected opportunity to win a Republican-held seat in November's elections. Democrats are clinging to a 53-47 advantage in the Senate but have many more incumbents standing for re-election than Republicans.