Livni, Netanyahu both claim victory in tight Israeli vote
With almost all the votes counted Wednesday morning, Livni's Kadima party claimed 28 seats, only one more than Netanyahu's conservative Likud party.
Avigdor Lieberman's ultra-nationalist Yisrael Beteinu party had a strong showing, gaining four seats to finish with 15 seats.
Defence Minister Ehud Barak's Labour party, Israel's ruling party for years, had its worst ever showing, winning just 13 seats. The Orthodox Shas party won 11 seats.
Several hours after polls closed, Livni and Netanyahu staged rival victory rallies, immediately followed by talks to find partners to form a coalition government.
"With God's help, I will lead the next government," Netanyahu told cheering Likud activists early Wednesday.
An hour later, Livni told her supporters that "the people have spoken, and they have chosen Kadima."
Livni called on Netanyahu to join a coalition government that she will lead. But Israeli newspaper Haaretz reported Wednesday that Likud officials have rejected that proposal.
Both Kadima and Likud will have to make alliances with other smaller parties to form a coalition government in the Knesset, the 120-seat parliament.
President to decide on coalition
Soldiers' votes on bases across the country will not be tallied until Thursday evening and could cause a shift in the results.
President Shimon Peres will ask the leader he believes is most capable of forming a coalition to try to put together a government. He expects to make that decision by Feb. 20, presidential spokeswoman Ayelet Frisch told the Associated Press.
However, other political observers said that period of deliberation by Peres will last a week after the official election tally is released on Feb. 18.
According to Israeli media reports, Livni may have the most seats, but it appears Netanyahu will end up with the larger bloc of right-wing and religious supporters.
"Of course, Netanyahu wants to form a wide government based on the national [right] bloc," Shas party leader Eli Yishai told reporters. "That is the right thing, that is what is wanted — and I hope, God willing, it will happen."
The leader Peres chooses will have up to 42 days to form a government.
"So the election happened last night but the politics behind this and whoever will be the next prime minister of Israel — this is going to take some time."
Lieberman, Netanyahu's chief of staff when the latter was prime minister, will play a crucial role in determining who leads the coalition.
Haaretz reported that Lieberman met with Livni in Jerusalem, where the two reportedly agreed to hold future talks. Lieberman was also due to meet with Netanyahu later in the day, the newspaper reported.
While Lieberman wouldn't rule out an alliance with either party, he told supporters "we want a right-wing government."
Overall, parties generally considered right-wing won a total of 65 seats, compared with 55 for more liberal and Arab parties.
Holdup in peace talks
The political uncertainty in Israel will likely slow progress in peace talks with the Palestinians, said Armstrong.
"The outcome of who will be the next prime minister will not be known for another six weeks so the truce negotiations are certainly in limbo now, as are the peace negotiations."
Egyptian negotiators have been working towards a formal truce to build on the unwritten ceasefire that began after Israel concluded its 22-day offensive into the Gaza strip on Jan. 18.
"If you're looking for a government that is able to negotiate the grand deal, I don't think it will be feasible," David Makovsky of the Washington Institute for Near East Policy told CBC Newsworld.
"And the Israeli public, being the victim of [rocket attacks] doesn't believe it either."
If Livni held the seat of power, she will likely continue talks with Palestinian President Mahmoud Abbas, who governs the West Bank. She also favours pursuing a two-state solution to the conflict. But Livni advocates a tough line against Gaza's Hamas government and was one of the architects of Israel's offensive into the strip.
Netanyahu has rejected the idea of a two-state solution and favours expanding Israeli settlements in the West Bank.
Lieberman is even less inclined to support a two-state solution — his party calls for redrawing Israel's borders in a way that would transfer areas with large Arab concentrations into Palestinian jurisdiction.
The CBC's Nahlah Ayed, reporting from Beirut said some Arab governments like Egypt and Jordan are "quite disappointed because they feel that the next [Israeli] government probably will not make peace a priority and also they feel this is the only solution to one of the region's most protracted…conflicts."
Rebel groups like Hamas in Gaza and Hezbollah in Lebanon, however, believe it does not matter who is in charge in Israel, said Ayed.
It is not immediately clear whether the prospect of weeks of political limbo would lessen chances for a long-term Gaza truce and a prisoner swap between Israel and Hamas.
Under the proposed exchange, Israel would free hundreds of Palestinians for an Israeli soldier held since June 2006 by Hamas-allied militants.
With files from the Associated Press