With 99 percent of the votes counted, Foreign Minister Tzipi Livni's Kadima Party is in first place with 28 of the Knesset's 120 seats, with Benjamin Netanyahu's Likud Party following one seat behind with 27.
Defense Minister Ehud Barak's Labor stands at 13 seats, while Avigdor Lieberman's Yisrael Beitenu party is expected to garner 15 seats.
The elections have two winners as well as two losers. According to the results, Livni gained the highest vote although her party remained behind its hawkish rival, Likud, in most of opinion polls.
However, parties on the same line with Kadima failed to gain the 60 parliamentary seats that would allow them to form a government.
That means either a government formed under Livni will include at least one rightist party or Kadima will be out of the equation and Netanyahu will be the prime minister. Still this outcome is seen as a failure for Netanyahu who lead all opinion polls right up until the final moments.
In short, the results set the stage for what could be weeks of coalition negotiations. Now the ball is on President Shimon Peres's court.
He will decide whether to ask Livni, a relative newcomer to politics, or Netanyahu, a former prime minister, to try to put together an administration after hearing recommendations from political parties.
Peres's discussions with Knesset factions could take about a week and coalition talks could drag on for more than a month, Israeli media suggested.
Some say such paralysis could dampen prospects for Egyptian-led attempts to broker a truce between
Hamas might be reluctant to sign a deal at the risk of having it overturned by the incoming coalition.