* Labour retains Peterborough seat by 683 votes
* Labour's Corbyn says Conservatives pushed to the margins
* Farage's Brexit Party vows to keep up pressure (Adds Farage comments, further details)
By Chris Radburn
PETERBOROUGH, England, June 7 (Reuters) - Britain's opposition Labour Party narrowly held on to a parliamentary seat in eastern England on Friday, seeing off a challenge from Nigel Farage's insurgent Brexit Party to win by less than 700 votes.
The victory could ease pressure for now on Labour leader Jeremy Corbyn to throw his unequivocal support behind a second Brexit referendum, which many in his party have been saying was the only way to break an impasse over Britain's departure.
But for the governing Conservatives, the fierce challenge by the Brexit Party, which only launched in April, will encourage contenders hoping to replace Prime Minister Theresa May to stick to a tough message on Britain's exit from the European Union.
The election is yet more evidence that Britain's 2016 vote to leave the EU is reshaping the country's politics, challenging the dominance of the two main parties as loyalties split over Brexit, the biggest shift in foreign policy since World War Two.
Labour hailed a slim victory by Lisa Forbes, who won 10,484 votes, beating the bookmakers' favourite, the Brexit Party, into second with 9,801 votes. May's Conservatives came third with 7,243 votes.
"This result shows that in spite of the divisions and deadlock over Brexit, when it comes to a vote on the issues that directly affect people's lives, Labour's case for real change has strong support across the country," said Corbyn.
"In this key seat, the Conservatives have been pushed to the margins."
The Peterborough election was triggered when Labour's Fiona Onasanya became the first member of parliament to be ousted in a recall petition, after she was jailed for lying about a speeding offence. She had won the seat from the Conservatives in 2017's general election with a majority of just 607 votes.
Labour's success was largely due to a large ground campaign to get the vote out - something Farage said his party could not match because it had only been in existence for eight weeks.
He instead turned his ire on the Conservatives, and warned if voters did not back his party at future elections, they would be laying the ground for a Corbyn government.
"There are now seats like this over the country where Conservative voters are going to start to realise that if you vote Conservative you're going to finish up with a Corbyn government," he told BBC radio.