Opposition wins Taiwan elections
The vote, which could shape the way the island handles relations with China, was the first since Mr Chen narrowly won the presidency in March.
The BBC's Taiwan correspondent, Chris Hogg, says the electorate has opted for a parliament that will act as a brake on Mr Chen's more controversial plans.
He says that while Mr Chen remains in charge because of the country's presidential system, he may find it difficult to get backing for proposals including constitutional changes and an $18bn arms deal with the US.
Both projects have been criticised by the Beijing government, which regards Taiwan as a renegade Chinese province and has accused Mr Chen of wanting to declare independence.
China has threatened to use force if the island ever declared a formal split.
'Don't want war'
President Chen's Democratic Progressive Party (DPP) has never won a majority in the parliament, the Legislative Yuan.
The DPP and its ally, the Taiwan Solidarity Union, together won 101 seats.
The remaining 10 seats went to independent candidates and other groups, the Central Election Commission said.
Mr Chen accepted responsibility for his alliance's defeat.
"We fully accept the result," he added.
The leader of the opposition Nationalists or Kuomintang (KMT) said the victory meant that people were eager for peace.
"We don't want war. We don't want our government to take the road of provocation and create tension," Lien Chan said.
Some people in Taiwan are keen to portray the election as round two of the presidential poll, and the campaign was dominated by the former presidential candidates, our correspondent says.
The opposition alliance still does not accept the result of the presidential vote.
President Chen's supporters believed that a convincing performance in the election would show China and his critics at home that he does have a mandate to govern.
The stakes were high for opposition leaders, too, our correspondent says.
The nationalists have lost two presidential elections in a row, and for the last three years they have relied on smaller parties for their parliamentary majority.