The results defied forecasts that Israel's next government would veer sharply to the right at a time when the country faces mounting international isolation, growing economic problems and regional turbulence. While that opens the door to unexpected movement on peace efforts, a coalition joining parties with dramatically divergent views on peacemaking, the economy and the military draft could just as easily be headed for gridlock - and perhaps a short life.
Israeli media said that with 99.8 per cent of votes counted, each bloc had 60 of parliament's 120 seats. Commentators said Netanyahu, who called early elections three months ago expecting easy victory, would be tapped to form the next government because the rival camp drew 12 of its 60 seats from Arab parties that traditionally are excluded from coalition building.
A surprising strong showing by a political newcomer, the centrist Yesh Atid, or There is a Future, party, in Tuesday's vote turned pre-election forecasts on their heads and dealt a setback to Netanyahu. Yesh Atid's leader, Yair Lapid, has said he would only join a government committed to sweeping economic changes and a serious push to resume peace talks with the Palestinians, which have languished throughout Netanyahu's four-year tenure.
The results were not official, and there was a slim chance of a slight shift in the final bloc breakdowns and a possibility that Netanyahu would not form the next government, even though both he and Lapid have called for the creation of a broad coalition.
Under Israel's parliamentary system, voters cast ballots for parties, not individual candidates. Because no party throughout Israel's 64-year history has ever won an outright majority of parliamentary seats, the country has always been governed by coalitions. Traditionally, the party that wins the largest number of seats is given the first chance to form a governing alliance in negotiations that center around promising Cabinet posts and policy concessions. If those negotiations are successful, the leader of that party becomes prime minister. If not, the task falls to a smaller faction.
Netanyahu's Likud-Yisrael Beitenu alliance polled strongest in Tuesday's election, winning 31 parliamentary seats. But that is still 11 fewer than the 42 it held in the outgoing parliament and below the forecasts of 32 to 37 in recent polls. Yesh Atid had been forecast to capture about a dozen seats but won 19, making it the second-largest in the legislature.
Addressing his supporters early on Wednesday, when an earlier vote count gave his bloc a shaky, one-seat parliamentary margin, Netanyahu vowed to form as broad a coalition as possible. He said the next government would be built on principles that include reforming the contentious system of granting draft exemptions to ultra-Orthodox Jewish men and the "responsible" pursuit of a "genuine peace" with the Palestinians. He did not elaborate, but the message seemed aimed at Lapid.
Netanyahu called Lapid early on Wednesday and offered to work together. "We have the opportunity to do great things together," Likud quoted the prime minister as saying. Lapid also called for the formation of a broad government.
"I call on the leaders of the political establishment to work with me together, to the best of their ability to form as broad a government as possible that will contain moderate forces from the left and right, the right and the left, so that we will truly be able to bring about real change," he told supporters after initial results were in early on Wednesday.
The goal of a broad coalition will not be an easy one, however, and will force Netanyahu to make some difficult decisions. In an interview last week, Lapid said he would not be a "fig leaf" for a hard-line agenda on peacemaking. A leading party member, Yaakov Peri, said on Wednesday that Yesh Atid will not join unless the government pledges to begin drafting the ultra-Orthodox into the military, lowers the country's high cost of living and returns to peace talks.
"We have red lines. We won't cross those red lines, even if it will cost us sitting in the opposition," Peri told sources.
That stance could force Netanyahu to promise overtures - perhaps far more sweeping than he imagined - to get peace negotiations moving again.
But a harder line taken by traditional and future hawkish allies could present formidable obstacles to coalition building.
Experience also shows that promises made during coalition negotiations do not always pan out. Centrist parties have been drawn before into coalitions dominated by hawks, only to bolt later in frustration over impasses in peacemaking. Yesh Atid has not yet spelled out specific conditions it would set down on this issue.
The election results surprised Israelis, given the steady stream of recent opinion polls forecasting a more solid hard-line majority and a weaker showing by centrists. Netanyahu may have suffered because of his close ties to the ultra-Orthodox and perhaps from complacency. Many voters chose smaller parties, believing a Netanyahu victory was assured. Pollster Mina Zemah said support surged for Lapid in the last few days of the campaign, and he drew about 50 percent of his support from the right.
Lapid said the election outcome reflected a longing for unity in a country bedeviled by schisms.
"That is the message that the results of the elections have sent us," he told cheering supporters. "The citizens of Israel today said no to politics of fear and hatred. They said no to the possibility that we might splinter off into sectors, and groups and tribes and narrow interest groups. They said no to extremists, and they said no to anti-democratic behavior."
Tensions with the United States, Israel's most important ally, also may have factored into the shift to Lapid. President Barack Obama was quoted last week as saying that Netanyahu was undermining Israel's own interests by continuing to build Jewish settlements on occupied lands the Palestinians want for a future state.
Netanyahu has won praise at home for drawing the world's attention to Iran's suspect nuclear program and for keeping the economy on solid ground at a time of global turmoil. In his speech, Netanyahu said preventing Iran from developing nuclear weapons would remain his top priority.
But he has repeatedly clashed with allies over his handling of the peace process, which has stalled over the issue of Israel construction in Jewish settlements in the war-won West Bank and east Jerusalem.
The Palestinians want Netanyahu to halt all settlement construction, but he says talks must start without preconditions and notes a 10-month slowdown he imposed earlier in his term did not encourage meaningful negotiations.
On Wednesday, the Obama administration said the U.S. approach to the Israeli-Palestinian conflict would not change, regardless of the Israeli election results.
"We will continue to make clear that only through direct negotiations can the Palestinians and the Israelis ... achieve the peace they both deserve," said White House spokesman Jay Carney.
Netanyahu himself has only grudgingly voiced conditional support for a Palestinian state, and his own party is dominated by hard-liners who oppose even that. A likely future coalition partner, the pro-settler Jewish Home party, which won 11 seats, goes so far to call for the annexation of 60 percent of the West Bank.
While Lapid advocates a softer line toward the Palestinians, his campaign focused on economic issues and it remains unclear how hard he will press Netanyahu on the issue.
Lapid's positions also fall short of Palestinian demands. Most critically, he opposes any division of Jerusalem. The Palestinians seek the West Bank, Gaza Strip and east Jerusalem, territories captured by Israel in the 1967 Mideast war, for a future state.
The Palestinians viewed the election results grimly.
"If he brings Lapid into his government, this would improve the image of the Netanyahu government in the eyes of the world. But it won't make him stop building settlements, particularly in east Jerusalem," said Mohammed Ishtayeh, a senior adviser to President Mahmoud Abbas.