Gentvilas won 374 votes against Paksas' 208 votes at the party's annual conference in the northern city of Panevezys.
Gentvilas is not an MP, having lost his seat in Parliament in the last election, while Paksas recently lost the prime minister's post for the second time in his career.
Ignoring Gentvilas' request that he remain leader of the party in Parliament, Paksas was instead elected the party's first deputy leader, a post intentionally created for the loser of the leadership battle.
In winning the contest Gentvilas returns to a post he held from 1996 to 1999, before he was ousted by Paksas.
Congress also elected three Gentvilas supporters as deputy chairmen - Vilnius Mayor Arturas Zuokas and Liberal MPs Gintaras Steponavicius and Klemensas Rimselis.
Gentvilas is thought to have won favor for his decisive leadership style, but at least one prominent liberal stuck by Paksas. Alvydas Medalinskas, the party's only MP in the previous Parliament, attributed much of its recent success to Paksas. "I voted for Paksas because he's an MP and therefore has more opportunities to influence political decisions," Medalinskas told The Baltic Times.
"Gentvilas is the former Klaipeda mayor, former economy minister and former acting prime minister, but he now has no state post. I was the only Liberal Union MP in the previous Parliament, but after Paksas joined we won 34 seats."
Gentvilas is currently unemployed but this week informed the newspaper Lietuvos Zinios he would soon head a new non-governmental organization called Liberal Reforms, for which he would receive a salary.
Soon after his victory Gentvilas told journalists his first goal was to create a Liberal shadow Cabinet to effectively oppose Prime Minister Algirdas Brazauskas, who has headed a coalition of the New Union and the Social Democratic Party since the collapse of Paksas' government in June. "We should be ready to take power," said Gentvilas.
Gentvilas also expressed relief that Paksas had resigned as leader of the parliamentary faction. "Rolandas could remain leader of the faction, but I expect this way we'll avoid a bad scenario and a split in the party," he said.A new leader of the parliamentary faction will be elected next week, and as head of the largest opposition party will become the official leader of the opposition in Parliament.
Wit the absence of any Paksas supporters on the party's executive board analysts now speculate that a break away by the Paksas wing is only a matter of time.
While both men have spoken of the need to avoid a split Paksas makes no secret of his ambitions to stand for president of the country next year, an idea the Liberal Union is not certain to support. The party will vote on this at the beginning of next year.
While Gentvilas and Paksas have both cultivated populist styles over the years, Paksas has been the more flamboyant, never missing an opportunity to show off his skills as an acrobatic pilot. He also has a penchant for dressing in leathers and attending bikers' conventions. Gentvilas meanwhile has frequently been the center of attention at Klaipeda's famous sea festivals, where, on occasion he has appeared dressed as Napoleon or Santa Claus.
Political commentators say that while the Liberal Union is ideologically the closest party to President Valdas Adamkus, it is far from being his puppet. In a row which continues to dominate the Lithuanian media Zuokas - Gentvilas' most prominent supporter - has supported rebuilding the royal palace in Vilnius while Adamkus, egged on by Conservative leader Vytautas Landsbergis, has criticized Brazauskas' enthusiasm for the plan.