Netanyahu: "The results of the election create an opportunity for change that the citizens of Israel yearn for"
Israeli Prime Minister Benjamin Netanyahu has pledged to form "as broad a government as possible" after his alliance won a narrow election victory.
His right-wing Likud-Beitenu bloc will have 31 seats in parliament - a sharp drop from 42, exit polls suggest.
In a major surprise, the centrist Yesh Atid (There is a Future) party came second with a predicted 18-19 seats, with Labour next on 17.
Analysts now predict weeks of political horse-trading to form a new cabinet.
They say that there is even a possibility that Mr Netanyahu's alliance would end up being in opposition.
Although the Likud-Beitenu alliance is the largest seat-winner, the split of right and left political blocs is a dead heat at 60-60 in the 120-member Knesset, the Israeli Central Elections Committee website showed, with 99.5% of votes counted.
Thirty-two parties were competing under a system of proportional representation. Parties must win at least 2% of the total vote to secure seats.
Full election results are expected on Wednesday, and the official ones will be announced on 30 January.
'We start anew'
Speaking shortly after the voting ended on Tuesday evening, Mr Netanyahu thanked the voters "for the opportunity to lead the state of Israel for the third time".
In an apparent reference to his electoral setback, the prime minister promised to reach out to "many partners" to form a wide coalition.
"Tomorrow we start anew," he said.
He also said that preventing Iran from obtaining nuclear weapons remained the government's first challenge.
Other top priorities, he added, would be stabilising the economy, striving for peace in the region, more egalitarian military and civilian services and reducing the cost of living.
In a brief speech, Yisrael Beitenu leader Avigdor Lieberman said: "I'm happy that our two main missions were achieved. We have ensured a continuity in the rule of the national camp and the continued leadership of Prime Minister Netanyahu."
Mr Netanyahu is now widely expected to seek an alliance with a new nationalist party, Habayit Hayehudi (Jewish Home), which is projected to have 12 seats.
The party - led by Mr Netanyahu's former chief-of-staff Naftali Bennett - has been recently challenging Likud-Beitenu's dominance on the right.
Analysts say the 18 or 19 seats predicted for Yesh Atid, headed by journalist-turned-politician Yair Lapid, is a stunning result for a newcomer.
Mr Lapid has said he will not join Mr Netanyahu's team unless the prime minister promises to push for peace with Palestinians.
"We have red lines. We won't cross those red lines, even if it will force us to sit in the opposition," Yaakov Peri, one of Yesh Atid's leaders, told Israeli TV.
Mr Netanyahu will have to work hard to woo the new political star to join any government, the BBC's Kevin Connolly in Tel Aviv reports.
Labour is expected to get 17 seats - up from just seven in the outgoing parliament. Labour leader Shelly Yachimovich said: "There is a high chance of a shake-up and an end to the Netanyahu government."
The wider world will examine these results for clues about Israel's future attitude towards peace talks with the Palestinians or the possibility of a pre-emptive strike on Iran's nuclear facilities, our correspondent says.
He adds that the truth of the matter is that it's far too early to make those judgements which will depend on the balance of forces within a future coalition more than on the outcome of the popular vote.
But the sudden and decisive lurch to the right that many predicted has not happened, our correspondent says. The results show that there is plenty of life on the left and the centre of Israeli politics too.
Mr Netanyahu, 63, has been in office since the 2009 election. He also served one term as prime minister between 1996 and 1999.
In recent years he has accelerated home construction in the West Bank and east Jerusalem, drawing anger from Palestinian leaders and criticism from Western partners.
However, unlike in previous elections, the campaign focused largely on social and economic issues, rather than the prospects for a permanent peace agreement with the Palestinians.
There have been unprecedented protests against the rising cost of living and a recent report said nearly one in four Israelis lived in poverty.
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