The Scottish government minister died in March at the age of 57, having last year taken medical leave to undergo treatment for secondary breast cancer.
First Minister John Swinney congratulated Mr Russell following the result.
In a post on X, the SNP leader said Ms Loudon had “fought a superb SNP campaign”.
He added: “We have made progress since the election last year but not enough. We still have work to do and we will do it.”
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With Reform UK never having won an election in Scotland, party deputy leader Richard Tice said candidate Ross Lambie coming in third was a “massive boost for us”.
Image: Reform UK deputy leader Richard Tice turned up to the count to support candidate Ross Lambie. Pic: PA
He added: “It’s a fantastic result, just a few hundred votes away from the SNP, nobody predicted that.
“I think that sets us up with excitement and momentum for the next 11 months into the Holyrood elections.”
Image: Davy Russell celebrating with Scottish Labour leader Anas Sarwar and the party’s deputy leader Dame Jackie Baillie. Pic: PA
Mr Russell said the constituents had voted to “take a new direction” with his party.
He added: “Like the people here in Hamilton, Larkhall and Stonehouse, and right across Scotland, we all feel we have been let down by the SNP.
“They’ve broken our NHS, wasted our money, and after nearly two decades they don’t deserve another chance.”
Image: Mr Sarwar and Mr Russell on the campaign trail. Pic: PA
Mr Russell said the community had also “sent a message” to Reform UK leader Nigel Farage “and his mob tonight”.
He added: “The poison of Reform isn’t us, it isn’t Scotland, and we don’t want your division here.
“Reform have no real answers to the issues we face, and they can’t beat the SNP here or replace them across Scotland.”
Mr Russell said his party was ready to “fix” the NHS and “end the SNP’s addiction to wasting your money”.
He added: “The road to a new direction for Scotland in 2026 – with Anas Sarwar as first minister and a Scottish Labour government – begins right here. So, let’s go and win it together.”
Image: By-election Scottish Conservative candidate Richard Nelson (left) and Reform UK candidate Ross Lambie. Pic: PA
Ten candidates went head-to-head in the Holyrood by-election:
• Collette Bradley, Scottish Socialist Party – 278 votes • Andy Brady, Scottish Family Party – 219 votes • Ross Lambie, Reform UK – 7,088 votes • Katy Loudon, Scottish National Party (SNP) – 7,957 votes • Janice MacKay, UK Independence Party (UKIP) – 50 votes • Ann McGuinness, Scottish Green Party – 695 votes • Aisha Mir, Scottish Liberal Democrats – 533 votes • Richard Nelson, Scottish Conservative and Unionist Party – 1,621 votes • Davy Russell, Scottish Labour Party – 8,559 votes • Marc Wilkinson, Independent – 109 votes
The votes were verified and manually counted at South Lanarkshire Council headquarters in Hamilton.
Image: Dame Jackie got emotional after Mr Russell’s win. Pic: PA
Campaigning became heated in the run up to the by-election, with Reform UK accused of running a “racist” ad on Facebook against Scottish Labour leader Anas Sarwar.
Reform leader Mr Farage continued to double down, accusing his rival of “sectarian politics”.
In response, the Scottish Labour MSP branded Mr Farage a “poisonous little man” and accused him of running a “campaign of dirt and smear”.
First Minister Mr Swinney had earlier warned it was a “two-horse race” between the SNP and Reform UK, urging voters to “defeat the gutter politics” of Mr Farage.
With less than a year to go before the Scottish parliament election, the result potentially offers a snapshot of how the political landscape north of the border could look in 2026.
Mr Sarwar said: “I think people need to change the script, because we’ve proven the pollsters wrong.
“We’ve proven the commentators wrong, we’ve proven the bookies wrong. We’ve proven John Swinney wrong and so many others wrong too.”