JERUSALEM (AP) -- Prime Minister Benjamin Netanyahu and his hard-line allies fared far worse than expected in a parliamentary election Tuesday, likely forcing him to reach across the aisle to court a popular political newcomer to cobble together a new coalition.
While Netanyahu appeared positioned to serve a third term as prime minister, the results marked a major setback for his policies and could force him to make new concessions to restart long-stalled peace talks with the Palestinians.
More than 99 percent of the votes had been counted by Wednesday morning and results showed the hawkish and dovish blocs were split about evenly.
Netanyahu's most likely partner was Yesh Atid, or There is a Future, a party headed by political newcomer Yair Lapid that showed surprising strength. Lapid has said he would only join a government committed to sweeping economic changes and a resumption of peace talks with the Palestinians.
Addressing his supporters early Wednesday, Netanyahu vowed to form as broad a coalition as possible. He said the next government would be built on principles that include reforming the contentious system of granting draft exemptions to ultra-Orthodox Jewish men and the pursuit of a "genuine peace" with the Palestinians. He did not elaborate, but the message seemed aimed at Lapid.
Shortly after the results were announced, Netanyahu called Lapid and offered to work together. "We have the opportunity to do great things together," Netanyahu was quoted as saying by Likud officials.
Netanyahu's Likud-Yisrael Beitenu alliance was set to capture about 31 of the 120 seats, significantly fewer than the 42 it held in the outgoing parliament and below the forecasts of recent polls.
With his traditional allies of nationalist and religious parties, Netanyahu could put together a shaky majority of 61 seats, results showed. But it would be virtually impossible to keep such a narrow coalition intact, though it was possible he could take an additional seat or two as numbers trickled in throughout the night.
The results capped a lackluster campaign in which peacemaking with the Palestinians, traditionally the dominant issue in Israeli politics, was pushed aside. Netanyahu portrayed himself as the only candidate capable of leading Israel at a turbulent time, while the fragmented opposition targeted him on domestic economic issues.
Netanyahu's goal of a broader coalition will force him to make some difficult decisions. Concessions to Lapid, for instance, will alienate his religious allies. In an interview last week with The Associated Press, Lapid said he would not be a "fig leaf" for a hard-line, extremist agenda.
Lapid's performance was the biggest surprise of the election. The one-time TV talk show host and son of a former Cabinet minister was poised to win 19 seats, giving him the second-largest faction in parliament.
Presenting himself as the defender of the middle class, Lapid vowed to take on Israel's high cost of living and to end the contentious system of subsidies and draft exemptions granted to ultra-Orthodox Jews while they pursue religious studies. The expensive system has bred widespread resentment among the Israeli mainstream.
Thanks to his strong performance, Lapid is now in a position to serve as the kingmaker of the next government. He will likely seek a senior Cabinet post and other concessions.
Yaakov Peri, a member of Lapid's party, said it would not join unless the government pledges to begin drafting the ultra-Orthodox into the military, lowers the country's high cost of living and returns to peace talks. "We have red lines. We won't cross those red lines, even if it will cost us sitting in the opposition," Peri told Channel 2 TV.
Addressing his supporters, a beaming Lapid was noncommittal, calling only for a broad government with moderates from left and right. "Israelis said no to the politics of fear and hatred," he said. "And they said no to extremism and anti-democracy."
There was even a distant possibility of Lapid and more dovish parties teaming up to block Netanyahu from forming a majority.
"It could be that this evening is the beginning for a big chance to create an alternative government to the Netanyahu government," said Shelly Yachimovich, leader of the Labor Party, which won 15 seats on a platform pledging to narrow the gaps between rich and poor.
Although that seemed unlikely, Netanyahu clearly emerged from the election in a weakened state.
"We expected more seats in the parliament," Danny Danon, a senior Likud member, told the AP. "But the bottom line is that Benjamin Netanyahu is the next prime minister of Israel."