Benjamin Netanyahu is likely to continue as Israeli prime minister as his Likud Party has emerged the largest party in a tightly fought election.
After 99.5% of the votes were counted Likud topped the chart with 29 seats, while the centre-left Zionist Union led by Isaac Herzog secured 24 seats in the 120-seat Knesset.
The exit polls predicted a tight race between the rivals but the unexpected results have set him on course to his fourth term as prime minister.
Israel has been ruled only by coalition governments, and Netanyahu will have to cobble together an alliance to remain in power.
"Against all odds, we have achieved a great victory for the Likud. We have achieved a great victory for the Likud-led nationalist camp and our people," Netanyahu addressed a crowd as the results were being announced.
"I am proud of the people of Israel who, at the moment of truth, knew how to separate between the important and the secondary issues and focus on the important ones."
The Joint List party has come third with 14 seats while the Yesh Atid won 11 seats.
Netanyahu has already said he is speaking to other "nationalist parties" but ruled out a coalition government with the Zionist Union. Herzog has also hinted that he is reaching out to other political parties.
The return of Netanyahu as Israeli premier will be a key factor in the Middle East politics especially in the backdrop of Israel's frosty ties with the US. In the final months of his term, Netanyahu took a hard line over a series of foreign and domestic policies.
He also went on to address the US Congress at the invitation of the Republicans, angering the Obama administration.