Israel headed for political gridlock yesterday with both sides declaring victory in an election that left the prospect of Israel and the Palestinians making peace as distant as ever.

Centrist Foreign Minister Tzipi Livni's Kadima party won the most votes but had little chance of building enough support for a resilient coalition government. Right-wing opposition leader Benjamin Netanyahu can get the support, but analysts said the likely alliance would prove dysfunctional.

"I won," read the headline of the country's biggest newspaper, Yedioth Ahronoth, over photographs of both leaders. But to some commentators, the rival claims showed that Israel, deeply beset with divisions over constitutional issues and years of failed diplomacy with Arabs, had lost.

"One thing is clear to all Israeli voters," said the paper's Eitan Haber. "The political system is shattered."

There was equanimity from the new administration of US President Barack Obama, who wants to revive peace talks to give the Palestinians a state alongside Israel, provided they can repair a schism triggered by Islamist Hamas's hold on Gaza.

"We certainly hope that a new (Israeli) government will continue to pursue a path to peace. I see no reason to think a new government would do something otherwise," State Department spokesman Robert Wood said in Washington.

Israeli President Shimon Peres must now decide whether to call on Ms Livni or Mr Netanyahu, who then has 42 days to form a government. An official election tally is due out by February 18, after which Mr Peres would have a week to make his nomination.

Israeli media said it seemed he would have no choice but to tap Mr Netanyahu if the majority rightist parties all back him.

But it would be the first time in Israel's 60-year history that the winner of an election would be passed over.

The results, not yet official, gave Mr Netanyahu 27 seats in the 120-seat Knesset, while Ms Livni's Kadima won 28.

She said she would be Prime Minister and invited Mr Netanyahu to join a "unity government". But Mr Netanyahu said he would lead the "nationalist camp" in Parliament, and control 64 seats.

"With God's help I will lead the next government," Mr Netanyahu, 59, told supporters of his Likud party.

"Tzipi Livni has only the slightest chance, or none at all, of forming a government under her leadership," said Abraham Diskin, a political scientist at Jerusalem's Hebrew University.

Avigdor Lieberman's far-right Yisrael Beiteinu party, which surged to third place in the ballot with its demand to test the loyalties of Israeli Arabs, emerged as a potential kingmaker.

"We want a nationalist government. We want a rightist government," he said. A deal was needed as fast as possible because the state "has been paralysed for half a year".

"People may not be aware, but we are still without a budget... in conditions of global financial crisis," Mr Lieberman said.

Israel's shekel weakened 0.6 per cent against the dollar yesterday to near a 16-month low at 4.0610 per dollar, versus 4.0370 before the election.

Mr Netanyahu had been cruising ahead in opinion polls until Mr Olmert's centre-left coalition, including Ms Livni, launched a military offensive against Hamas and other factions in the Gaza Strip, to stop them firing rockets at towns in southern Israel.