Benjamin Netanyahu's rightwing Likud-Beitenu list won a narrow majority in Tuesday's election but was weakened by an unexpectedly strong showing by the centrist Yesh Atid, according to exit polls.
The polls, released by Israel's three main television stations, showed Netanyahu's Likud, running on a joint list with the hardline Yisrael Beitenu, winning just 31 seats in the 120-seat Knesset, followed by Yesh Atid with 18-19 and Labor in third place with 17.
The far-right nationalist religious Jewish Home party, which had been widely expected to take second place, won 12 seats.
Although Israel's political system does not specify that the party with the most votes is guaranteed to form the next coalition, Netanyahu is widely expected to be handed the task of pulling together 61 MPs to form a majority.
Polls have consistently predicted Netanyahu's reelection, with pundits suggesting he would preside over a coalition leaning further to the right. The exit polls suggest it is now more likely to be a center-right government.
Shortly after the polls were broadcast, Netanyahu thanked Israelis for reelecting him for a second consecutive term in office and pledged to build a coalition which was "as broad as possible."
"I wish to thank millions of Israelis who realized their democratic right today," he wrote on his Facebook page.
"Based on the results in the exit polls, it's clear the citizens of Israel determined they want me to continue as prime minister, and that I form a government as wide as possible," he wrote.
He said he would immediately begin efforts to to do that.
The new government will be faced with tackling two key issues: how to revive moribund peace talks with the Palestinians and how to tackle the question of Iran's contested nuclear program, which Israel and much of the West believes is a guise for a weapons drive.
But domestic challenges will be no less pressing, with a major budget crisis and austerity cuts on the horizon, as Israelis express widespread discontent over spiraling prices.
Throughout the day, long queues formed outside several polling stations in Jerusalem and Tel Aviv after a slow start.
Although final turnout figures were not immediately available, participation stood at 63.7 percent two hours before the polls closed at 2000 GMT.
Polling ahead of the vote had projected an easy win for Likud-Yisrael Beitenu, suggesting it would win a minimum of 32 mandates.
But as voting entered the final stretch, Netanyahu posted a worried-sounding message on his official Facebook page, although it was not clear whether it was a case of last-minute electioneering.
"The Likud's rule is in danger. I ask that you leave everything and go out to vote (Likud) now. This is very important, to ensure Israel's future," he wrote.
There was also a lot of noise on Twitter and in the press about a higher-than-expected showing for Yair Lapid, head of the Yesh Atid, which made few waves during the campaign.
"Bibi failed to realize that Lapid is his main rival, and not Bennett. Lapid campaigned under everybody's radar," tweeted Aluf Benn, editor of the left-leaning Haaretz newspaper, using Netanyahu's nickname.
The charismatic 40-year-old Naftali Bennett is the new leader of the far-right national religious Jewish Home party.
The party firmly opposes a Palestinian state and won just three seats in 2009.
Bennett's success has rattled Netanyahu, with the 63-year-old premier pushing to stem the defection of voters to Jewish Home by burnishing his own pro-settlement credentials.
Among settlers, who make up about four percent of the electorate, there was a clear preference for Bennett and the extremist Otzma LeYisrael party, although some remain faithful to Likud.
Election day is a public holiday in Israel, and in Tel Aviv thousands packed the beaches to enjoy a snap of unseasonably warm weather, but voting stations were also busy as people turned out to cast their ballots.
"I'm very excited, it's a great day for democracy. I hope change will be made today. It is more important than ever. I'm voting for Lapid because I believe in him," said 49-year-old Nitza Salman.
In Jerusalem's trendy German Colony neighborhood, a 32-year-old teacher expressed similar frustration, but said she would vote for Bennett.
"He is strong, and he is religious but not extreme," she said, without giving her name. "We are so tired of Netanyahu."
Polls suggest the rightwing-religious bloc will take between 61 and 67 seats, compared with 53 to 57 for the center-left and Arab parties.
Some 5.65 million Israelis were eligible to participate in the vote.
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