It secured 41%, a sharp drop from 2011, when it won nearly half of the vote.
Under Turkey`s proportional representation system, this means the AKP will need to form a coalition or face entering a minority government.
The pro-Kurdish HDP crossed the 10% threshold, securing seats in parliament for the first time.
There were jubilant scenes as the party`s supporters took to the streets chanting "we are the HDP, we are going to the parliament".
"It is a carnival night," 47-year-old Huseyin Durmaz told AFP. "We no longer trust the AKP."
HDP leader Selahattin Demirtas ruled out entering into a coalition with the AKP, pointing out that the election results had put an end to discussions about a presidential system.
The result is a blow to President Recep Tayyip Erdogan`s plans to boost his office`s powers.
He first came to power as prime minister in 2003 and had been seeking a two-thirds majority to turn Turkey into a presidential republic.
"The discussion of executive presidency and dictatorship have come to an end in Turkey with these elections," Mr Demirtas told a news conference in Istanbul.
Speaking from the balcony of the AKP headquarters in Ankara Prime Minister Ahmet Davutoglu said: "The winner of the election is again the AKP, there`s no doubt."
But he added: "Our people`s decision is final. It`s above everything and we will act in line with it."
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