Exit polls had forecast a dead heat but with almost all votes counted, results give Likud a clear lead over its main rival, the centre-left Zionist Union.
The outcome gives PM Benjamin Netanyahu a strong chance of forming a right-wing coalition government.
It puts the incumbent on course to clinch a fourth term and become Israel’s longest-serving prime minster.
The latest tally gives Likud 30 seats in the 120-seat parliament, the Knesset, with Zionist Union on 24 seats.
In a speech to jubilant supporters in Tel Aviv after Tuesday’s polls closed, Benjamin Netanyahu described the vote as a “great victory” for Likud, which had trailed the Zionist Union in opinion polls in the run-up to the election.
Benjamin Netanyahu “plans to immediately begin forming a government in order to complete the task within two to three weeks,” a statement from Likud said.
It said he had already spoken to parties he saw as possible coalition partners, including right-wing and ultra-Orthodox parties and centrist Kulanu, which won 10 seats.
Zionist Union leader Yitzhak Herzog called Benjamin Netanyahu early on March 18 to congratulate him on the result and wished him “good luck”.
“Nothing has changed, we will keep fighting for a just society,” Yitzhak Herzog was quoted as saying by Israeli newspaper Haaretz.
“This is not an easy morning for us and for those who believe in our way,” Yitzhak Herzog and Zionist Union co-leader Tzipi Livni said in a statement.
Benjamin Netanyahu had vowed not to allow the creation of a Palestinian state, while Zionist Union expressed support for a two-state solution and promised to repair relations with Palestinians and the international community.
In the wake of the vote, chief Palestinian negotiator Saeb Erekat said Palestinians would step up their bid for statehood.
“It is clear that Prime Minister Benjamin Netanyahu will form the next government, so we say clearly that we will go to the International Criminal Court in the Hague and we will speed up, pursue and intensify diplomatic efforts,” he told AFP news agency.
Almost 72% of those eligible voted in Tuesday’s election. Turnout was four points higher than the previous election in 2013.
Israel’s form of proportional representation always produces smaller parties and coalition government. None has ever won an outright majority under Israel’s proportional representation voting system.
The Joint Arab List, an alliance of Israeli Arab-dominated parties that united for the first time, came third with 14 seats.
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