Israel headed for political gridlock after the two main parties both claimed victory in yesterday’s general election.
Centrist Tzipi Livni's Kadima party won the most votes but had little chance of building enough support for a coalition.
The right-wing Likud party, led by Benjamin Netanyahu, may be able to secure enough support to form a coalition, but such a government may prove dysfunctional.
"I won," read the headline of the country's biggest newspaper, Yedioth Ahronoth, over photos of both leaders.
President Shimon Peres must now decide whether to call on Ms Livni or Mr Netanyahu, who would then have 42 days to form a government.
Israeli media said it seemed he would have no choice but to tap Mr Netanyahu if the majority rightist parties all back him. But it would be the first time in Israel's 60-year history that the winner of an election would be passed over.
The results, not yet official, gave Mr Netanyahu 27 seats in the 120-seat Knesset, while Ms Livni's Kadima won 28. She said she would be prime minister and invited Mr Netanyahu to join a "unity government".
But Mr Netanyahu said he would lead the "nationalist camp" in parliament, and control 64 seats. "With God's help I will lead the next government," Mr Netanyahu (59), told supporters of his Likud party.
Avigdor Lieberman's far-right, anti-Arab Yisrael Beiteinu party, now third largest, emerged as a potential kingmaker. "We want a nationalist government. We want a rightist government," he said. A deal was needed as fast as possible because the state "has been paralysed" for six months.
"People may not be aware, but we are still without a budget ... in conditions of global financial crisis," Mr Lieberman said.
Mr Netanyahu had been cruising ahead in opinion polls until former president Ehud Olmert's centre-left coalition, including Ms Livni, launched a military offensive against Islamist militants in the Gaza Strip to stop them firing rockets at towns in southern Israel.
The 22-day January war, while left 1,300 Palestinians and 13 Israelis dead, had massive public support within Israel. After a truce on January 18th, the election campaign resumed as Israel pursued indirect talks with Hamas on a durable Gaza ceasefire. The ceasefire talks are still going on, and uncertainty in Israel will not stop them, both sides said today.
European Union foreign policy chief Javier Solana said Israel's next government must also restart serious talks on a comprehensive peace deal, and could not let them stagnate. "I think if we continue in a crisis management mode, if we don't enter into a conflict resolution mode it will be going back and back again," Mr Solana said.
Ms Livni (50), led the main peace talks last year with the Palestinian Authority, and would try to revive them. But Mr Netanyahu is cooler on the key trade-offs for a peace deal - returning occupied land and curbing Jewish settlement. Mr Lieberman and religious parties in a coalition would be likely to set virtually impossible conditions for a peace deal.
The Palestinian Authority, which governs the occupied West Bank, said that whoever ends up in charge Israel is obliged to continue talks and to meet international obligations.
"The ascent of the Israeli right does not worry us," President Mahmoud Abbas told Italy's La Repubblicanewspaper. "In whatever form, the government, once in power, will ultimately end up with responsibility, pragmatism prevailing."
The outcome was also unwelcome news for US president Barack Obama, who wants to revive peace talks to give the Palestinians a state alongside Israel, provided they can repair the split between Mr Abbas and Hamas.
Reuters