Livingstone applied for readmittance to the Labour Party in 2002 but was rejected. In November 2003, however, rumours emerged that the Labour Party would allow Livingstone to rejoin, just ahead of the 2004 London mayoral election. Opinion polls consistently gave a poor showing to Labour's official candidate, Nicky Gavron, and many in the party leadership (including Tony Blair himself) feared that Labour would be humiliated by a fourth-place finish. In mid-December, Gavron announced she would stand down as the Labour candidate in favour of a 'unity campaign,' with Gavron as Livingstone's deputy, with Labour's National Executive Committee voting 25-2 to pave the way for Livingstone's readmittance. The deal hinged on a 'loyalty test' administered by a special five-member NEC panel on 9 January. The panel recommended that Livingstone be allowed back in the party. The move towards readmittance came amid considerable opposition from senior party members, including Chancellor of the Exchequer Gordon Brown, Deputy Prime Minister John Prescott, and former party leader Neil Kinnock. In a ballot of Labour Party members in London, Livingstone was overwhelmingly endorsed as the Labour candidate for the 2004 Mayoral election.
Livingstone was re-elected Mayor of London on 10 June 2004. He won 36% of first preference votes to Conservative Steven Norris's 28% and Liberal Democrat Simon Hughes's 15%. Six other candidates shared the remainder of the votes. When all the candidates except Livingstone and Norris were eliminated and the second preferences of those voters who had picked neither Livingstone or Norris as their first choice were counted, Livingstone won with 55% to Norris's 45%.
Livingstone sought re-election in 2008, but was defeated by Conservative candidate Boris Johnson on a night that saw the Labour Party suffer its worst electoral defeats for forty years. Once first and second votes were taken into account Johnson had 1,168,738 votes, Livingstone 1,028,966 - a margin of 139, 772 votes or just over 6% of those who voted.
Speaking immediately after the count, Johnson paid public tribute to his defeated rival, praising "the very considerable achievements of the last mayor of London" and describing Livingstone as "a very considerable public servant". Johnson went on to say "You shaped the office of mayor. You gave it national prominence and when London was attacked on 7 July 2005 you spoke for London."
Johnson also spoke of Livingstone's "courage and the sheer exuberant nerve with which you stuck it to your enemies" and expressed a desire that the new Conservative administration could "discover a way in which the mayoralty can continue to benefit from your transparent love of London".
Livingstone's greatest challenge as Mayor of London has been dealing with the city's ageing transportation infrastructure. Despite conflict over appropriate funding schemes and engineering challenges to modernising both the London Underground and the city's bus system, an Association of London Government survey, conducted by MORI towards the end of Livingstone's first term in 2004, suggested growing public satisfaction with public transport, with buses in particular being seen as more frequent and reliable.
In accordance with his pre-election pledge, bus fares were frozen for four years, but then the standard single cash fare on buses more than doubled. Further, and contrary to his pledge during his first election campaign, when he said "only a de-humanised moron would get rid of the Routemaster", Livingstone removed the famous Routemaster buses from routine service on 9 December 2005, claiming it was because the new buses were wheelchair-accessible, although several of the old buses are used on shortened "heritage routes". There was some question over the legality of using the old Routemaster under the Disability Discrimination Act 1995 as the Routemasters effectively banned wheel chair users.
In tandem with the removal of Routemaster buses, Livingstone oversaw the introduction of bending articulated buses. These buses have faced criticism for allegedly being fire-prone, dangerous to cyclists, and unable to navigate some winding streets; see London articulated bus controversy.
Livingstone has been a strong proponent of the Oyster card smartcard ticketing system for London's public transport network introduced in 2003. In late 2005, Livingstone proposed large fare increases for on-the-spot tickets across the Tube and bus network to encourage regular travellers to use the automated Oyster system to reduce queuing at Underground stations and avoid delays in conductorless buses as drivers issue tickets. The plans, although ratified by the GLA and introduced in January 2006 were condemned by those who argued that the increases would increase the cost of travelling in London to tourists and others who do not travel regularly. Civil liberties groups have expressed concern over the way in which Transport for London is able to track the movements of passengers using the Oyster card system. Livingstone moved to make all bus journeys free for passengers under the age of 18 enrolled in full-time education who travel with an Oyster card and introduced initiatives to enable visitors to buy an Oyster card before arriving in London.
One of the key points of conflict between Livingstone and the Labour Party had been the proposed 'Public-Private Partnership' for the London Underground. Livingstone had run in 2000 on a policy of financing the improvements to Tube infrastructure by a public bond issue, which had been done in the case of the New York City Subway. However the Mayor did not have power in this area at the time as the Underground operated independently of Transport for London. The PPP deal went ahead in July 2002, but it did not diminish Livingstone's desire to re-join Labour. Metronet, one of the winners of the contract for PPP, subsequently went into administration in July 2007.
Livingstone introduced the London congestion charge with the purpose of reducing traffic congestion in central London. Since being introduced the charge has proved to be controversial, though Transport for London maintains that traffic has fallen by 20% within the charge zone since the scheme began. One reason for the controversy is that whilst the scheme has been lucrative for its private-sector operator, Capita, some people argue it has not made enough money for public transport because the money has been spent on other things.
However, its apparent success in reducing congestion has led to similar schemes being proposed in other major cities such as New York.
In November 2003, Livingstone was named 'Politician of the Year' by the Political Studies Association, which said his scheme was 'bold and imaginative'.
The United States Embassy for many years has refused to pay the charge because they argue it is a tax and not a charge on congestion.
Ken Livingstone has been called “an environmentalist, a leftist, a lover of newts," and has made a significant effort to reduce London’s impact on the environment. He began by creating the London Hydrogen Partnership and the London Energy Partnership in his first term as Mayor of London. The Mayor’s Energy Strategy , “green light to clean power,” commits London to reducing its emissions of carbon dioxide by 20%, relative to the 1990 level, by 2010. However, he does support the Thames Gateway Bridge in East London that Friends of the Earth say "would bring few benefits to the local people and lead to more traffic, more noise and air pollution and an increase in climate-changing emissions". In October 2007, London Councils stated Livingstone had gone back on his promise to help chair the developing London Waste and Recycling Board, and to provide £6 million of funding for the project, because "the government had failed to provide him with absolute control of the Board."