Netanyahu delivered a tempered speech where he refused to concede the close race. "Israel needs a strong, stable, Zionist government committed to Israel as a national state for the Jewish people," he said.
Prime minister's Likud party continuing negotiations with far-right and ultra-Orthodox groups after winning March election.
Europe's nationalist parties are rushing to support formerly reviled Israel as an ally against the 'scourge' of Islamisation.
Turnout was high in the close contest between Isaac Herzog and Benjamin Netanyahu.
TV news said Likud and the Zionist Union had secured 27 seats each in the 120-member Knesset.
The Israeli election has exposed public fatigue with Benjamin Netanyahu's stress on national security rather than socio-economic problems.
With a week to go before polling, Netanyahu's opponent Herzog noses ahead.
Obama administration officials on Wednesday questioned Netanyahu's judgment.
Netanyahu said world powers had pledged to prevent Iran from acquiring nuclear weapons.
An Israeli election campaign ad says the left will show ISIS the way to Jerusalem, and uses a song by the rap group.
The news fired up center-left opponents before a parliamentary election next month.
The Israeli prime minister is gambling the speech will help win the March poll.
Paul Begala is expected to focus Yitzhak Herzog's campaign on the economy.
Soviet migrants make up 20% of Israel's Jewish population, making their conservative, working-class vote significant in politics.
In the run-up to Israel's general election in March, all sides are suffering from a string of damaging accusations.
"You asked for a babysitter, you got a Bibi-sitter!"
An interview with a rising star of Israeli politics.