Democrats, meanwhile, are in a nail-biter fight with Hillary Clinton and Bernie Sanders less than a percentage point apart.
The victory for Cruz is the first time that the conventional laws of politics have applied to Trump, a billionaire businessman who has built his campaign around the perception that he's a winner who can bring his unique skills to the White House.
But Trump's big personality, social media presence and large rallies failed to overcome Cruz's more traditional approach to Iowa's retail politics. Cruz spent months touring the state and reaching out to evangelical voters. The win sets him up as a formidable contender in the delegate-rich, Southern states that crowd the GOP calendar in the coming weeks and offers movement conservatives hope that one of their own can become the nominee for the first time since Ronald Reagan.
As he claimed victory, Cruz fired immediate shots at both Trump and the party elites who disdain him.
"Iowa has sent notice that the Republican nominee and the next President of the United States will not be chosen by the media, will not be chosen by the Washington establishment," Cruz said.
With about 99% of the GOP vote in, Cruz was ahead of Trump 28% to 24%. Marco Rubio was at 23%.
Trump delivered a short but gracious speech, saying he loved Iowa and vowed to go on next week to win the New Hampshire primary.
"We will go on to get the Republican nomination and we will go on to easily beat Hillary or Bernie," Trump told supporters. "We finished second, and I have to say I am just honored.
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