| TEL AVIV
TEL AVIV Israeli Foreign Minister Tzipi Livni led exit polls after Tuesday's election but right-winger Benjamin Netanyahu said he expected to be named prime minister following a cliffhanger vote that was still too close to call.
Netanyahu said polls showed there would be a right-wing majority in Israel's highly fragmented parliamentary system and that his Likud party would be able to form a new coalition.
"With God's help I will lead the next government," he said.
That rightward shift in the Knesset will, in any case, dent hopes in the Obama administration for an Israeli coalition that can drive forward in making peace with the Palestinians and other Arab neighbors after last month's war in the Gaza Strip.
A tight finish once tallies are complete on Wednesday will hand a key role to President Shimon Peres, who in theory can nominate any legislator to try to form a government.
In practice, there is no precedent for not nominating the leader of the biggest party immediately after an election.
It is likely to be weeks before a new cabinet can be formed.
Potential kingmaker Avigdor Lieberman kept his options open after his far-right party dominated by fellow Russian-speaking immigrants surged into third on a wave of anti-Arab rhetoric.
Palestinians said they had little expectation of progress on their demands, whether Livni or Netanyahu became premier.
With no party securing more than a quarter of parliament's 120 seats, Kadima supporters chanted "Tzipi Livni, Queen of Israel!" as a thunder and lightning storm lashed the country.
Livni was to speak later. Whatever the final outcome, polls showed a dramatic achievement for the 50-year-old former Mossad secret agent and corporate lawyer who is bidding to become Israel's first woman leader since Golda Meir in the 1970s.
Former premier Netanyahu was cruising to victory until Livni and the center-left coalition under outgoing Kadima leader Ehud Olmert launched a three-week offensive in Gaza that won popular support in Israel despite an international outcry over the 1,300 Palestinians killed in the Hamas-ruled enclave.
Exit polls on three Israeli television channels showed Kadima retaining around its present 29 seats in the 120-seat, single-chamber Knesset, with Likud two seats behind.
Soldiers, whose votes could account for a couple of seats, were excluded from exit polls and that could favor Netanyahu as tallying continues.
"By morning we will be ahead and when the soldiers votes come in, we will be way ahead," said Likud lawmaker Yuval Steinitz. "The nationalist camp won big."
One television station put the right-left split at 64 seats for the right to 56 for the left, which could deny Livni the premiership and persuade Peres to nominate Netanyahu as premier.
Kadima cabinet minister Yaacov Edri conceded Livni could struggle to build a coalition. But he added: "It won't be easy, but the Israeli public has had its say, and it's Tzipi."
Yisrael Beiteinu (Our Home is Israel), a far-right party led by former Netanyahu aide Lieberman, was forecast to win 14 or 15 seats, up from his current 11. That disappointed many supporters, after poll scores last week as high as 19. But the party's performance still appeared to have dented Likud.
Mark Heller of Tel Aviv University said: "Netanyahu felt the right-wing parties nipping at his heels. He shifted his own focus to the right to head that off, and thereby lost some votes in the center ... A lot of people were at the last minute frightened off by the idea of Netanyahu being prime minister."
Lieberman said his "heart's desire" was a right-wing coalition -- but he added "We're not ruling anyone out."
The Labor party of Defense Minister Ehud Barak, another former prime minister, trailed in fourth place with 13 seats, according to exit polls, down from 19 at present. The party of Israel's founders and the dominant force for its early decades, Labor has suffered from a rightward shift of the electorate.
Whoever Peres nominates has six weeks to form a government.
Livni's failure to cobble together a new coalition in November following Olmert's resignation in a corruption scandal triggered the election more than a year ahead of schedule.
Livni led peace talks with the Palestinians on a two-state solution, which stalled last year but which U.S. President Barack Obama wants to resume. Netanyahu is cooler on ceding occupied territory to Palestinians and is more likely to resist U.S. demands to curb settlement expansion in the West Bank.
During his three years in office to 1999, the U.S.-educated Netanyahu had strained relations with the last Democratic president, Bill Clinton, and Washington analysts believe a Livni administration would be favored by the White House. However, her hands would still be tied by right-wing parties.
Senior Palestinian negotiator Saeb Erekat said: "Regardless of the coalition formed ... the next Israeli government will be unable to deliver the requirements of peace ... This election did not focus on making peace with the Palestinians.
"Israelis' eyes are turned toward war with Iran."
Netanyahu has repeatedly said he would not sit by if Iran acquired nuclear weapons, something Israel believes it is trying to do, despite Tehran's denials. That leads some analysts to see a Netanyahu government as more likely than another to consider a military strike on Iran, even if its U.S. ally disagrees.
Olmert will stay on as caretaker premier throughout the period when a new government is being formed.
(Additional reporting by Adam Entous, Joseph Nasr, Ori Lewis, Alastair Macdonald, Jeffrey Heller, Dan Williams, Steven Scheer and Douglas Hamilton in Jerusalem, Wafa Amr in Ramallah and Tova Cohen in Tel Aviv, in Jerusalem, Writing by Alastair Macdonald, Editing by Jeffrey Heller)