Informal talks have begun in Israel on a new coalition government after the election victory of the Kadima Party.
Ehud Olmert says he is willing to talk to the Palestinians
With nearly all votes counted, the party has won 28 of the 120 seats in the Knesset. It was founded four months ago by now coma-stricken Ariel Sharon.
Possible partners are second-placed Labour and other smaller parties.
Kadima leader and acting PM Ehud Olmert has vowed to pursue plans to define Israel's final borders. Palestinians urged him not to do so unilaterally.
Leaders of the militant group Hamas are set to take formal control of the Palestinian government later on Wednesday.
Israeli President Moshe Katsav has said formal talks to form a new coalition government will start on Sunday.
A Kadima official told the Haaretz newspaper he expected a coalition to emerge after the Passover holiday, in about three weeks' time.
RESULTS - 99% COUNTED
1. Kadima: 28 seats, centrist
2. Labour: 20 seats, centre-left
3. Shas: 13 seats, ultra-Orthodox
4. Pensioners: 7 seats, single-issue
5. Torah Judaism: 6 seats, ultra-Orthodox
6. Meretz: 4 seats, left-wing
7. Israel Beitenu: 12 seats, Russian emigres, far-right
8. Likud: 11 seats, right-wing
9. Arab parties: 10 seats
10. National Union/Religious: 9 seats, far-right, settlers
But Mr Olmert could have trouble forming and maintaining a stable coalition, with a margin of victory less decisive than Kadima had hoped, correspondents say.
Voter turnout was 62.3%, a record low.
With 99% of ballots counted, the centre-left Labour Party has come second with 20 seats, a 15.1% share.
Kadima officials said other probable partners included the ultra-Orthodox Shas, with 13, and the Pensioners party, which won seven seats.
Likud, winner of the last election, was beaten into fifth place with 11 seats.
Since the creation of Israel in 1948, the country has been governed either by the Labour or Likud parties, which makes the Kadima victory historic.
Final results are expected on Friday, with election observers still counting the votes of groups including soldiers, diplomats and prisoners.
Earlier on Wednesday, Mr Olmert told his party he was prepared to hold peace talks with the Palestinians - but would act alone if he had to, in order to establish permanent borders for Israel by 2010.
Mr Olmert paid tribute to Mr Sharon before laying out his plans for his four-year term in office.
He told the Palestinian leadership he was ready "to give up parts of the beloved land of Israel", but that it was time for the Palestinians to "relate to the existence of the state of Israel... [and] to stop terror".
Correspondents say Mr Olmert's task will not be easy.
He will face stiff opposition from Israel's settler movement, he will have to convince the US to back his plan, and he will not be able to ignore a Hamas-led Palestinian government, says the BBC's Jeremy Bowen in Jerusalem.
Palestinian Prime Minister-designate Ismail Haniya said that what mattered for his people was a party that recognised their right to a state with Jerusalem as its capital.
Palestinian leader Mahmoud Abbas said the results would not change anything unless Mr Olmert changed his unilateral approach to resolving the conflict.
Kadima, which means "forward" in Hebrew, was founded by Mr Sharon last year after he left Likud amid bitter rows over his withdrawal of settlers and troops from the Gaza Strip.
Mr Sharon suffered a stroke and fell into a coma in January.
Israel occupied Gaza and the West Bank, including east Jerusalem in the 1967 war. Its settlements are illegal under international law, although Israel rejects that.