Israeli Foreign Minister Tzipi Livni and hawkish ex-premier Benjamin Netanyahu were locked in a battle for power after a photo-finish election that could send peace talks into limbo.
Livni's centrist Kadima party won 28 seats in the 120-member parliament, just one ahead of Netanyahu's Likud party, leaving the country facing perhaps weeks of political uncertainty.
An overall lurch to the right has made it more likely that Netanyahu will return to the nation's most powerful post, but Livni immediately started coalition talks, meeting on Wednesday with ultra-nationalist Avigdor Lieberman.
"This is an opportunity for unity that can promote issues that are important for our two parties. They agreed to continue their contacts," Livni's office said after the meeting with the Yisrael Beitenu leader, who has emerged as a kingmaker after Tuesday's vote.
Lieberman, who met Netanyahu later in the day, kept his cards close to his chest. "We will clarify our positions and will do our part in putting together a cabinet as soon as possible," he said after his talks with Livni.
Another party leader who saw Netanyahu was Eli Yishai, head of the religious Shas group, which is in the current government but fell out with Livni over her refusal to keep the future of Jerusalem out of Middle East peace talks.
Hardline parties gained ground on the back of the Gaza war and security concerns, and the right's likely return to power could hamper US-backed efforts to revive the faltering Middle East peace negotiations.
Both Netanyahu -- who became Israel's youngest prime minister in 1996 -- and Livni swiftly laid claim to the premiership.
Under Israel's political system, it is the party considered best able to form a coalition -- and not necessarily the winner of the most seats -- which will be tasked by the president with forming a new government.
Netanyahu can in theory rally 65 seats, including Likud's 27, 15 won by ultra-nationalist Yisrael Beitenu, 11 from the ultra-Orthodox Shas, five from the religious United Torah Judaism and seven from two extreme-right settler parties, Jewish Home and National Union.
|Israeli Benjamin Netanyahu's right-wing Likud party leader delivers a speech on elections night at the Likud headquarters in Tel Aviv|
Livni can count on the support of 44 MPs including Kadima's 28, 13 from Labour and three from the left-wing Meretz.
The remaining 11 seats are held by Arab parties, which are highly unlikely to join any coalition.
The new kingmaker is Lieberman, a 50-year-old tough-talking Soviet immigrant and onetime bouncer whose Yisrael Beitenu bumped the veteran Labour party to a historic low of 13 seats.
The Palestinian Authority expressed dismay at the right's strong showing. "It's obvious the Israelis have voted to paralyse the peace process," senior negotiator Saeb Erakat told AFP.
A spokesman for Hamas -- the target of Israel's three-week war on Gaza that killed over 1,300 Palestinians and 13 Israelis -- said voters had picked "the most bellicose candidates, those who are the most extremist in their rhetoric."
The White House declined to comment on the results, but pledged to work for Middle East peace with whichever government emerges from the cliffhanger polls.
"We look forward to working with the next Israeli government to strengthen the special relationship between the United States and Israel," national security council spokesman Michael Hammer said.
US President Barack Obama later called Israeli President Shimon Peres to offer him congratulations on his country's general elections, the White House said.
"They had a good discussion, and the President complimented President Peres on his recent op-ed in which he reaffirmed his strong commitment to achieving a two-state solution to the Israeli-Palestinian conflict," said a White House statement.
The European Union urged the future Israeli government to work on building an independent Palestinian state and to honour the Jewish state's peace obligations.
"We hope that the new Israeli government will honour the obligations taken by Israel ... and refrain from measures rendering a two-state solution impossible," the EU's Czech presidency said in a statement.
Although pundits are eyeing Netanyahu as prime minister, observers said he does not want to form a purely right-wing government in order to avoid a clash with Washington and to head off the risk it could be held hostage to the whims of smaller parties.
But his wish for a unity government is complicated by Livni's performance as she is unlikely to agree to join such a coalition unless she leads it.
Amid the stalemate, a rotating premiership used in the 1980s is starting to emerge as a viable option.
"Livni will serve for two years as prime minister, after which Netanyahu will serve for two years," wrote the mass-selling Yediot Aharonot.
"The voters will love that solution, at first at least. Netanyahu will love it less. Livni isn't going to be overjoyed with the solution, but she probably won't have much of a choice."