Kadima Party leader Tzipi Livni reacts during an election night rally in Tel Aviv on Tuesday. (Peter Dejong/Associated Press)Foreign Minister Tzipi Livni was slightly leading former prime minister Benjamin Netanyahu in an Israeli electoral contest seen to have major implications for peace negotiations in the Mideast, according to elections officials.

By Wednesday morning local time, the votes had been counted at 99 per cent of the country's polling stations. The votes showed Livni's centrist Kadima party narrowly in first place with 28 of the Israeli parliament's 120 seats.

The vote was still too close to call, however, with Netanyahu's conservative Likud party holding 27 seats.

Soldiers' votes on bases across the country will not be tallied until Thursday evening and could cause a shift in the results.

Neither Kadima nor Likud is expected to capture more than 30 seats in Israel's Knesset. The election's victor will have to forge alliances with a number of other parties in order to govern. President Shimon Peres will ask the leader he believes is most capable of forming a coalition to try to put together a government, which could take as long as six weeks.

Despite what the polls were showing, Netanyahu said he will still be Israel's next prime minister with "God's help."

In a speech to a crowd of supporters, Netanyahu said the right-wing parties had enough votes to form a coalition that could serve as a governing majority in Israel's fragmented parliamentary system.

Livni, meanwhile, called on Netanyahu to join a national unity government that she would lead.

The exit polls showed conservative parties had won 66 seats, while more liberal parties captured just 54.

Alliances needed

Benjamin Netanyahu, leader of the Likud party, casts his ballot in Israel's general election at a polling station in Jerusalem on Tuesday. (Bernat Armangue/Associated Press)The Likud party appeared to have the upper hand in forming a governing coalition thanks to that strong showing by other right-wing parties.

Netanyahu could try to develop a more broad-based government by adding Defence Minister Ehud Barak's Labour party, which was in fourth place with only about 13 seats.

Livni and her natural coalition allies will have only about 45 seats in the parliament and to put together her own government, she would have to entice Avigdor Lieberman to join. He won about 15 seats.

Lieberman heads the nationalist Yisrael Beiteinu party, which includes in its platform a policy to redraw Israel's borders in a way that would transfer areas with large Arab concentrations into Palestinian jurisdiction.

Lieberman also favours making citizens take an oath of loyalty to Israel. Those who refuse to take the oath would be barred from voting or running for office.

"His support has skyrocketed through the course of this campaign and if the polls hold true, and he does get as many seats as are being predicted right now, he will surpass the left-leaning Labour party and take third spot," said CBC's Peter Armstrong.

The CBC's Nahlah Ayed, reporting from Beirut, said Arab commentators have expressed concerns the prospect of Lieberman as kingmaker could prove dangerous for the region and for the Israeli-Palestinian conflict.

"There is concern among Arab governments that have been promoting a two-state solution … that with this election, the window for a two-state solution might have been lost or closed."

Lebanon has had a tense relationship with Israel — including lingering tensions from 2006, when Israel invaded southern Lebanon in a 34-day conflict with Hezbollah militants based there.

"And on the other hand ordinary people … have said they really don't see any tangible difference between the parties, no less because of what happened in Gaza last month," she said.

As far as many Lebanese people are concerned, "the likelihood of peace is still remote and the possibility of war stays no matter who wins," Ayed said.

Some analysts are also suggesting that Kadima and Likud may be forced to consider a rotating power scenario, which occurred in 1984.

While polling had suggested Likud held the lead in the months leading up to the election, Kadima has appeared to close the gap in recent weeks. Netanyahu and Likud oppose ceding land to the Palestinians and favour allowing Israeli settlements in the West Bank to expand.

Livni and Kadima favour a more moderate foreign policy, but she was one of the architects of Israel's offensive against Hamas in the Gaza Strip last month and has been striving to present an image of herself as tough but sensible.

The election is being held to replace former prime minister Ehud Olmert, who stepped down last year after being accused of corruption. Attempts to form a new government without holding elections were unsuccessful.

With files from the Associated Press