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Livni's centrist Kadima party won 28 seats in the 120-member parliament, just one ahead of Netanyahu's Likud party, leaving the country facing perhaps weeks of political uncertainty.
An overall lurch to the right has made it more likely that Netanyahu will return to the nation's most powerful post, but Livni immediately started coalition talks, meeting on Wednesday with ultra-nationalist Avigdor Lieberman.
Tzipi Livni and Benjamin Netanyahu are locked in a battle for power after Israel's elections. Duration: 00:53
"This is an opportunity for unity that can promote issues that are important for our two parties. They agreed to continue their contacts," Livni's office said after the meeting with the Yisrael Beitenu leader, who has emerged as a kingmaker after Tuesday's vote.
Lieberman, who planned to meet with Netanyahu later in the day, kept his cards close to his chest. "We will clarify our positions and will give our part to putting together a cabinet as soon as possible," the YNet News website quoted him as saying.
Netanyahu already held talks on Wednesday with Eli Yishai, head of the religious Shas party, which is a member of the current government but has fallen out with Livni over her refusal to keep the future of Jerusalem out of Middle East peace talks.
Hardline parties gained ground on the back of the Gaza war and security concerns, and the right's likely return to power could hamper US-backed efforts to revive the faltering Middle East peace negotiations.
Both Netanyahu -- who became Israel's youngest prime minister in 1996 -- and Livni swiftly laid claim to the premiership.
"The people voted in their masses. I can feel the great responsibility to translate the power entrusted to me into deeds and to unite the nation," Livni's office quoted her as saying on Wednesday.
Netanyahu told supporters on Tuesday he was convinced he would be able to form the next government.
"I can unite all forces of this nation and lead Israel."
Under Israel's political system, it is the party considered best able to form a coalition -- and not necessarily the winner of the most seats -- which will be tasked by the president with forming a new government.
President Shimon Peres has said he will begin consultations next week.
Netanyahu can in theory rally 65 seats, including Likud's 27, 15 won by ultra-nationalist Yisrael Beitenu, 11 from the ultra-Orthodox Shas, five from the religious United Torah Judaism and seven from two extreme-right settler parties, Jewish Home and National Union
Livni can count on the support of 44 MPs including Kadima's 28, 13 from Labour and three from the left-wing Meretz.
The remaining 11 seats are held by Arab parties, which are highly unlikely to join any coalition.
The new kingmaker is Lieberman, a 50-year-old tough-talking Soviet immigrant and onetime bouncer whose Yisrael Beitenu bumped the veteran Labour party to a historic low of 13 seats.
The Palestinian Authority expressed dismay at the right's strong showing. "It's obvious the Israelis have voted to paralyse the peace process," senior negotiator Saeb Erakat told AFP.
A spokesman for Hamas -- the target of Israel's three-week war on Gaza Gaza that killed over 1,300 Palestinians and 13 Israelis -- said voters had picked "the most bellicose candidates, those who are the most extremist in their rhetoric."
French Foreign Minister Bernard Kouchner said: "The right has won" the Israeli elections but Peres could still opt to ask Livni "to form a government."
Kouchner, who was in Manama with French President Nicolas Sarkozy as part of a Gulf tour, said: "The Israeli system, fully proportional, allows any coalition."
Although pundits are eyeing Netanyahu as prime minister, the smooth-talking media-savvy tactician nevertheless faces tricky bargaining ahead.
Observers said he does not want to form a purely right-wing government in order to avoid a clash with Washington and head off the risk it could be held hostage to the whims of smaller parties.
But his wish for a unity government is complicated by Livni's performance as she is unlikely to agree to join such a coalition unless she leads it.
Amid the stalemate, a rotating premiership used in the 1980s is starting to emerge as a viable option.
"Livni will serve for two years as prime minister, after which Netanyahu will serve for two years," wrote the mass-selling Yediot Aharonot.
"The voters will love that solution, at first at least. Netanyahu will love it less. Livni isn't going to be overjoyed with the solution, but she probably won't have much of a choice."
An overall lurch to the right has made it more likely that Netanyahu will return to the nation's most powerful post, but Livni immediately started coalition talks, meeting on Wednesday with ultra-nationalist Avigdor Lieberman.
Tzipi Livni and Benjamin Netanyahu are locked in a battle for power after Israel's elections. Duration: 00:53
"This is an opportunity for unity that can promote issues that are important for our two parties. They agreed to continue their contacts," Livni's office said after the meeting with the Yisrael Beitenu leader, who has emerged as a kingmaker after Tuesday's vote.
Lieberman, who planned to meet with Netanyahu later in the day, kept his cards close to his chest. "We will clarify our positions and will give our part to putting together a cabinet as soon as possible," the YNet News website quoted him as saying.
Netanyahu already held talks on Wednesday with Eli Yishai, head of the religious Shas party, which is a member of the current government but has fallen out with Livni over her refusal to keep the future of Jerusalem out of Middle East peace talks.
Hardline parties gained ground on the back of the Gaza war and security concerns, and the right's likely return to power could hamper US-backed efforts to revive the faltering Middle East peace negotiations.
Both Netanyahu -- who became Israel's youngest prime minister in 1996 -- and Livni swiftly laid claim to the premiership.
"The people voted in their masses. I can feel the great responsibility to translate the power entrusted to me into deeds and to unite the nation," Livni's office quoted her as saying on Wednesday.
Netanyahu told supporters on Tuesday he was convinced he would be able to form the next government.
"I can unite all forces of this nation and lead Israel."
Under Israel's political system, it is the party considered best able to form a coalition -- and not necessarily the winner of the most seats -- which will be tasked by the president with forming a new government.
President Shimon Peres has said he will begin consultations next week.
Netanyahu can in theory rally 65 seats, including Likud's 27, 15 won by ultra-nationalist Yisrael Beitenu, 11 from the ultra-Orthodox Shas, five from the religious United Torah Judaism and seven from two extreme-right settler parties, Jewish Home and National Union
Livni can count on the support of 44 MPs including Kadima's 28, 13 from Labour and three from the left-wing Meretz.
The remaining 11 seats are held by Arab parties, which are highly unlikely to join any coalition.
The new kingmaker is Lieberman, a 50-year-old tough-talking Soviet immigrant and onetime bouncer whose Yisrael Beitenu bumped the veteran Labour party to a historic low of 13 seats.
The Palestinian Authority expressed dismay at the right's strong showing. "It's obvious the Israelis have voted to paralyse the peace process," senior negotiator Saeb Erakat told AFP.
A spokesman for Hamas -- the target of Israel's three-week war on Gaza Gaza that killed over 1,300 Palestinians and 13 Israelis -- said voters had picked "the most bellicose candidates, those who are the most extremist in their rhetoric."
French Foreign Minister Bernard Kouchner said: "The right has won" the Israeli elections but Peres could still opt to ask Livni "to form a government."
Kouchner, who was in Manama with French President Nicolas Sarkozy as part of a Gulf tour, said: "The Israeli system, fully proportional, allows any coalition."
Although pundits are eyeing Netanyahu as prime minister, the smooth-talking media-savvy tactician nevertheless faces tricky bargaining ahead.
Observers said he does not want to form a purely right-wing government in order to avoid a clash with Washington and head off the risk it could be held hostage to the whims of smaller parties.
But his wish for a unity government is complicated by Livni's performance as she is unlikely to agree to join such a coalition unless she leads it.
Amid the stalemate, a rotating premiership used in the 1980s is starting to emerge as a viable option.
"Livni will serve for two years as prime minister, after which Netanyahu will serve for two years," wrote the mass-selling Yediot Aharonot.
"The voters will love that solution, at first at least. Netanyahu will love it less. Livni isn't going to be overjoyed with the solution, but she probably won't have much of a choice."
