Coalition talks have begun in Israel after near-complete general election results gave right-wing and centre-left blocs 60 seats each in parliament.
President Shimon Peres is expected to ask Prime Minister Benjamin Netanyahu to attempt to form a new government.
His Likud-Beitenu alliance lost a quarter of its seats in the Knesset but remains the largest grouping with 31.
He has offered to work with the newly-formed Yesh Atid party, which shocked observers by coming second with 19.
However, its leader, popular former TV presenter Yair Lapid, has demanded reform of a law under which ultra-Orthodox Jewish seminary students can defer their military service. Religious parties in the current governing coalition are strongly opposed to any changes.
Mr Lapid has also said he would only join a government that was committed to reviving the peace process with the Palestinians.
"Whoever wants Yesh Atid in the coalition will need to bring these things," Ofer Shelah, a senior member of the party, told Israeli Army Radio.
On Wednesday morning, Israeli media reported that with 99.8% of votes counted, the joint electoral list of Mr Netanyahu's Likud party and the ultra-nationalist Yisrael Beitenu (Israel is our Home) party of his former Foreign Minister Avigdor Lieberman had won 31 seats.
That would be 11 seats fewer than the two parties' combined total from the last election.
The ultra-nationalist Habayit Hayehudi (Jewish Home), which rejects the notion of an independent Palestinian state, won 11 seats, as did the ultra-Orthodox religious Shas party.
The smaller ultra-Orthodox United Torah Judaism party won seven, bringing the right-wing bloc's total to 60 of the 120 seats in the Knesset.
Yesh Atid (There is a Future), a secular centrist party which was only set up by Mr Lapid last year, had been expected by pollsters to win about 12 seats, but is set to get 19, just ahead of the Labour party with 15.
The centrist Hatnua (The Movement) grouping of former Foreign Minister Tzipi Livni won six seats, as did the left-wing Meretz party. Kadima, which was the largest party in the last parliament, got just two.
The remaining 12 of the left-wing bloc's 60 seats went to Arab Israeli parties, but they are traditionally neither asked nor seek to join governing coalitions.
The BBC's Kevin Connolly in Tel Aviv says coalition building in these circumstances will not be easy for Mr Netanyahu.
Addressing Likud supporters after preliminary results gave the right-wing bloc a one-seat parliamentary majority, Mr Netanyahu promised to form as "as broad a government as possible".
"It is an opportunity to make changes that the citizens of Israel wish upon themselves and that will serve all the citizens of Israel," he said.
Mr Netanyahu added: "The new government will be based on five principles: The first is security. We will meet the security threats Israel faces, first and foremost is stopping Iran from getting a nuclear weapon.
"The second principle is fiscal responsibility... The third is political responsibility - we will strive to achieve true peace. The fourth is ensuring the equal distribution of burden in society; and the fifth is cutting the cost of living and housing prices."
The third and fourth commitments appeared to be an appeal to Mr Lapid, who the prime minister also telephoned overnight. Mr Netanyahu was quoted by Likud as telling him: "We have the opportunity to do great things together."
Mr Lapid meanwhile told his supporters that Israel needed a government that would "bring about real change". He acknowledged that a "heavy responsibility has been placed upon our shoulders."
Labour party leader Shelly Yachimovich meanwhile said she had also initiated contacts aimed at forming a centre-left governing coalition.
"We have an opportunity here that we cannot miss to liberate the citizens of Israel from the abuse of the Netanyahu government. Since the fate of Israeli society is hanging in the balance, we must act quickly, discreetly and seriously," she added.
The leader of the largest party is usually asked by the president to form a government once the election commission submits the official results, which is expected to happen next Wednesday. They will be given 28 days to do so, although this can be extended by a further 14 days.
A senior member of the Palestine Liberation Organisation (PLO) said the election result was unlikely to produce an Israeli government more committed to negotiating a permanent peace agreement.
"I don't see a peace coalition or a peace camp emerging now and revitalising itself," Hanan Ashrawi told reporters in Ramallah.