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 In a pre-election blitz, Netanyahu made a series of promises
designed to shore up his Likud base and draw voters from other
right-wing and nationalist parties. He pledged to go on building
settlements on occupied land and said there would be no Palestinian
state if he was re-elected.
With 99.5 percent of votes counted on Wednesday, Likud had won 29-30
seats in the 120-member Knesset, comfortably defeating the
center-left Zionist Union opposition on 24 seats, Israel's Central
Election Committee and Israeli media said. A united list of Arab
parties came in third.
It amounted to a dramatic and unexpected victory - the last opinion
polls published four days before the vote had shown the Zionist
Union with a four-seat advantage.
Although Netanyahu must still put together a coalition to remain in
power, his victory all but guarantees that he will be given the
first opportunity to form a government, putting him course to become
the longest-serving leader in Israeli history.
 But the promises he made to woo ultranationalist voters in the final
days of the campaign, by effectively jettisoning the "two state" aim
of more than two decades of Middle East peacemaking, could have
far-ranging consequences, including deepening rifts with the United
States and Europe.
In a statement, Likud said Netanyahu intended to form a new
government within weeks, with negotiations already underway with the
far-right pro-settler Jewish Home party led by Naftali Bennett, the
centrist Kulanu party and ultra-Orthodox groups.
The critical party to get on side will be Kulanu, led by former
Likud member and communications minister Moshe Kahlon, who won 10
seats, making him a kingmaker given his ability to side with either
Netanyahu or the center-left opposition.
"Reality is not waiting for us," Netanyahu said. "The citizens of
Israel expect us to quickly put together a leadership that will work
for them regarding security, economy and society as we committed to
do - and we will do so."
Isaac Herzog, the leader of the Zionist Union, conceded defeat,
saying he had called Netanyahu to congratulate him.
The Tel Aviv stock market was largely unmoved by Netanyahu's
victory, with the benchmark Tel Aviv 100 index up marginally at
mid-day.
"The market's indifference to the results apparently stems from its
belief that the coalition that will be formed will be more stable
than its predecessor," said Idan Azoulay, chief investment officer
at the Epsilon brokerage.
HARD ROAD AHEAD
While Likud is the largest party, the process of forming a coalition
is hardly assured. It needs 61 seats in the Knesset and crossing
that threshold will be challenging given the amount of division
across Israel's political landscape.
Netanyahu's victory will prolong the country's troubled relationship
with U.S. President Barack Obama.
The White House was already angry with him for addressing the U.S.
Congress at the invitation of Republican lawmakers in a bid to
scupper U.S. nuclear talks with Iran, before Netanyahu's hard tack
to the right in the campaign's final days.
Saeb Erekat, chief Palestinian negotiator in peace talks with Israel
that collapsed in April, said in a statement that Netanyahu's win
showed "the success of a campaign based on settlements, racism,
apartheid and the denial of the fundamental rights of the
Palestinian people".
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During much of the campaign, Netanyahu had focused on security
issues and the threat from Iran's nuclear program, a message that
appeared to gain little traction with voters.
The Zionist Union's focus on socio-economic issues, including the
lack of housing and the high cost of living in Israel, appeared to
be generating much more momentum.
But Netanyahu's move to the right, playing up fears of the spread of
Islamist groups, promising no concessions to the Palestinians and
raising alarm about growing support for Arab-Israeli parties, looks
to have spurred his base into action.
From the Palestinian point-of-view, the results are a deep concern,
raising the prospect of more settlement expansion on land they want
for their own state in the occupied West Bank and East Jerusalem, as
well as in Gaza.
If Netanyahu follows through on his pledges it would put him on a
collision course with the Obama administration and the European
Union, which has been weighing steps including trade measures to
sanction Israel for its settlements policy.
Parliaments in historically pro-Israel countries including France
and Britain have held non-binding votes favoring recognizing
Palestinian independence. Western countries have generally held back
from this step, arguing that a Palestinian state must emerge from
negotiations, but with Netanyahu having apparently abandoned the
"two state" principle of such talks, the argument is harder to make.
His victory also raises questions about what happens on Iran, with
Obama determined to pursue negotiations towards a deal on Tehran's
nuclear program and Netanyahu determined to scupper it, including by
mobilizing domestic U.S. opinion.
The Palestinians may quickly create problems for Netanyahu as they
will formally become members of the International Criminal Court on
April 1 and have said they will pursue war crimes charges against
Israel over its 48-year occupation of the West Bank and last year's
war in Gaza.
Pre-empting those steps, Israel has suspended the transfer of tax
revenue it collects on the Palestinians' behalf, holding back around
$120 million a month. That has crippled the Palestinian budget and
led to deep pay cuts for public sector workers.
(Writing by Luke Baker, additional reporting by Steve Scheer and Ari
Rabinovitch; Editing by Peter Graff)
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