Official results gave Likud 29 seats compared with 24 for Isaac Herzog`s Zionist Union in the 120-member parliament, a gap wider than the one projected in exit polls and likely to ease Netanyahu`s way towards building a governing coalition.
On the basis of the exit polls alone, which indicated the hard-fought race had ended in a dead heat, Netanyahu swiftly claimed victory late on Tuesday, while Herzog said "everything is still open".
By morning, with results in from 99 percent of polling stations, Likud had powered past the Zionist Union and Netanyahu seemed set to get the nod from Israel`s president to try to put together a coalition.
A fourth term for Netanyahu would make him Israel`s longest serving leader. He can tap far-right and religious parties - his traditional allies for support - but will also need to enlist centrists who have been non-committal.
Netanyahu pulled off the feat with a pitch for ultranationalist votes in the final days of the hard-fought campaign, using tactics that could deepen a feud with the White House.
Seeking to persuade supporters of smaller right-wing parties to "come home" to Likud, Netanyahu promised more building of Jewish settlements. Cautioning that yielding territory would open the way for attacks against Israel by Islamist militants, Netanyahu said the Palestinians would not get their own state if he were re-elected.
Those sweeping promises, if carried out, would further isolate Israel from the United States and the European Union, which believe a peace deal must accommodate Palestinian demands for a state in the occupied West Bank, East Jerusalem and Gaza.
Netanyahu has focused on Iran`s nuclear program and militant Islam. But many Israelis had said they were tiring of the message, and the center-left campaigned on social and economic issues, surging in polls before election day.
The Obama administration has been angry with Netanyahu since he addressed the U.S. Congress two weeks ago at the invitation of Republican lawmakers, to oppose U.S. nuclear negotiations with Iran.
"Against all odds: a great victory for Likud," a beaming Netanyahu told cheering supporters in a speech at party election headquarters in Tel Aviv. He said he had spoken to leaders of other right-wing parties and urged them to form a "strong and stable" government with him without delay.
"He`s a magician, he`s a magician," the crowd chanted.
LIKUD POWERS TO UPSET OVER RIVAL
Opinion polls in the run-up to the ballot had shown Zionist Union with a three- to four-seat advantage over Likud, suggesting the public had warmed to Herzog, who won over voters with flashes of wit after enduring being lampooned for his short stature and reedy voice.
A new centrist party, Kulanu, led by former communications minister Moshe Kahlon could be a major player in coalition talks. After the balloting ended, Kahlon said he did not rule out a partnership with either Likud or Zionist Union.
Turnout was around 72 percent, higher than the last election in 2013.
After consultation with all parties, it will be up to President Reuven Rivlin to name the candidate he deems best placed to try to form a coalition. The nominee will have up to 42 days to do so.
Rivlin has called for national unity, signaling he favors a government that would pair both Likud and Zionist Union - a partnership Netanyahu rejected during the campaign.
Naftali Bennett, leader of the ultranationalist Jewish Home party, said he had spoken with Netanyahu and agreed to open "accelerated" coalition talks with him.
Ramping up his bid for right-wing votes, Netanyahu on election day accused left-wing groups of trying to remove him from power by busing Arab-Israeli voters to polling stations, a statement that drew a sharp rebuke from Washington.
Some political rivals accused Netanyahu of racism over the remarks.
Saeb Erekat, chief Palestinian negotiator in peace talks with Israel that collapsed in April, told Reuters it appeared Netanyahu would form the next government.
Citing the Israeli leader`s rejection of a Palestinian state, Erekat said: "Mr Netanyahu has done nothing in his political life but to destroy the two-state solution."
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