However, soldiers' votes on bases across the country weren't being tallied until Thursday evening, which could shift the results by a seat or two.

Regardless of who gets the most votes, Netanyahu's Likud Party appeared to have the upper hand in forming a ruling coalition thanks to strong showing by other right-wing parties.

"With God's help, I will lead the next government," Netanyahu told a raucous crowd of cheering supporters chanting his nickname, Bibi, early Wednesday. "The national camp, led by the Likud, has won a clear advantage."

Soon after, Livni took the stage before a crowd of flag-waving supporters and flashed a V-for victory sign. "Today the people chose Kadima. ... We will form the next government led by Kadima," she declared.

Exit polls had earlier showed Livni with a slight lead, but strong gains by right-wing parties overall would make it difficult, and perhaps impossible, for her to form a government.

Even if Livni could overcome the formidable obstacles and become Israel's second female prime minister after Golda Meir, the early results suggested she would have to rely on the participation of right-wing parties opposed to her vision of giving up land in exchange for a peace deal with the Palestinians.

Despite the uncertainties, both sides claimed victory.

Applause, cheers and whistling erupted at Kadima headquarters in Tel Aviv as television stations began reporting their exit polls, with supporters jumping up and down and giving each other high-fives and hugs. At Likud headquarters, Netanyahu supporters expressed confidence their man would still become Israel's leader.

Israeli exit polls have not always been reliable, especially when the vote is close, but the projected results marked a dramatic slide for Netanyahu, who had held a solid lead in opinion polls heading into the election.

The projections showed hard-line parties winning as many as 66 seats in the 120-member parliament, while liberal parties captured just 54 seats. Preliminary results were expected early Wednesday.

Israelis vote for parties, not individuals. Since no party won a parliamentary majority, the leader of one of the major parties must try to put together a coalition with other factions — a process that can take up to six weeks.

In coming days, President Shimon Peres will ask the leader who he believes is most capable of forming a coalition to try to put together a government.

If he chooses Livni, she would have to reach out to hard-liners. The elections were called after she failed to put together a ruling coalition when scandal-plagued Prime Minister Ehud Olmert announced he was stepping down last fall.

Alternatively, Peres could turn to Netanyahu, who appeared to be in a better position to put together a majority.

Netanyahu, who opposes giving up territory to make room for a Palestinian state, could find himself on a collision course with President Barack Obama, who is promising an aggressive push for Mideast peace. Netanyahu says he would allow West Bank settlements to expand and is seen as likely to contemplate military action against Iran — positions that would likely put him at odds with Obama.

A strong showing by ultranationalist candidate Avigdor Lieberman appeared to have taken a sizable chunk of votes that would have otherwise gone to Netanyahu.

The exit polls put Lieberman's Yisrael Beitenu Party in third place behind Kadima and Likud — and ahead of Labor, the party that ruled Israel for decades. That gives Lieberman, who based his campaign on denying citizenship to Israeli Arabs he considers disloyal, a key role in coalition building. Livni would almost certainly not be able to form a government without his support.

Lieberman said his party's strong showing means he holds the key to forming the new Israeli government. He said he had spoken to both Livni and Netanyahui and told them he could be persuaded to join either one of them.

"It is up to Lieberman who will form the next coalition," said Menachem Hofnung, a professor of political science at Hebrew University. "Lieberman has emerged as the kingmaker. He is the winner of these elections and it depends on who he sides with over the next few weeks as to who will be prime minister."

Netanyahu, who was prime minister a decade ago, portrayed himself as the candidate best equipped to deal with the threats Israel faces — Hamas militants in Gaza, Hezbollah guerrillas in Lebanon and behind them an Iranian regime that Israel believes is developing nuclear weapons.

He has derided the outgoing government's peace talks as a waste of time, and said relations with the Palestinians should be limited to developing their battered economy.

Livni, who has led Israel's peace talks the past year, has pledged to continue the negotiations with the moderate Palestinian government in the West Bank. At the same time, she advocates a tough line against the Hamas government in the Gaza Strip, and was one of the architects against a bruising Israeli military offensive in Gaza last month.

At Likud headquarters, activists dismissed Kadima's edge and predicted Netanyahu would be tapped to form the next government.

"I am certain that Netanyahu will be the next prime minister," said Likud lawmaker Gilad Erdan. "Netanyahu has a clear advantage because the right wing parties have a larger bloc. The test is not which party gets the most votes, but which candidate has the best chance to form a coalition, and that person is Benjamin Netanyahu."

Israel's three main TV stations released exit polls as voting ended at 10 p.m. Tuesday.

Channel One and Channel 10 each gave 30 of 120 parliament seats to Kadima and 28 seats to Netanyahu. Channel Two gave 29 seats to Kadima and 27 to Likud.

Kadima lawmaker Haim Ramon predicted the party would lead the next government.

"We are the only party that can approach both the right wing and the left," he told Channel 2 TV. But he acknowledged the results would make it difficult for anyone to govern.

Israel's Palestinian peace partners in the West Bank said the next Israeli government would have to stop building in the West Bank before talks could resume.

"We now have clear conditions for whoever heads the Israeli government," said Rafiq Husseini, a senior aide to Palestinian President Mahmoud Abbas. "The conditions for negotiations to resume begin with the immediate halt of settlement activities."

Peace talks have not included the Gaza Strip's Hamas rulers, who do not recognize Israel's right to exist and recently were the target of a devastating Israeli military offensive.

In Gaza, Hamas spokesman Fawzi Barhoum said the election results don't make a difference in the lives of Palestinians because Israel "is still working to eliminate the Palestinian existence.

"Anyone who thinks that new faces might bring change is mistaken," Barhoum said, before the exit polls were released.