Tel Aviv  - Exit polls in Israel showed the centrist Kadima party of Foreign Minister Tzipi Livni scoring an extremely close, upset victory over the hardline Likud party of former premier Benjamin Netanyahu.

The three separate polls, commissioned by Israel's news channels and issued late Tuesday, projected that the ruling Kadima would retain its position as the largest party in the Knesset with a razor- thin lead of some two seats over the Likud.

As results trickled in throughout the night, the lead narrowed further to one mandate with 80 per cent of ballots counted by early Wednesday. According to the incomplete results, Kadima could count on 29 mandates in the 120-seat Knesset, against 28 for the Likud.

The ultra-nationalist Israel Beiteinu party of Soviet-born Avigdor Lieberman was forecast to become the third-largest part in the Israeli Parliament, though with considerably fewer mandates than predicted by pre-election surveys.

The Labour Party of Defence Minister Ehud Barak, according to the exit polls and first results, dropped into fourth place for the first time in Israeli history. The left-wing party has always either led the country or served in coalition or opposition as the second- largest party.

The close results prompted both a smiling Netanyahu and a beaming Livni to declare victory - in addition to a triumphant Lieberman, who declared he held "the key" to any new coalition and was quick to list hawkish conditions for joining any government.

Netanyahu, a hardline former premier who has pledged to topple the Hamas regime in Gaza if elected and who led in opinion polls throughout nearly the entire campaign, shrugged off the narrow gap behind Kadima and declared that he would lead the next government.

The Likud has more than doubled its mandates, and the broader right-wing bloc has grown from a minority in the outgoing Knesset to a majority, he noted.

That "has one clear meaning, that the people want change. The people want to travel a new path. Our path has won, and we will be the path that will lead the nation," he declared in Tel Aviv to hundreds of supporters chanting his nickname, "Bibi! Bibi!"

The strength of the Likud-led right-wing bloc, even if Kadima maintains a lead, severely limits Livni's options in forming a government and makes her dependent on either Netanyahu or Lieberman.

That did not prevent her from declaring: "We won today."

"All those who left their homes today gave their faith to us, to Kadima, and those are the clear results of this evening," she said, urging Netanyahu to join a government of a national unity that she would lead.

If both Livni and Netanyahu fail to form a coalition, a rotation agreement that would see both take turns as premier could be put in place.

Lieberman told cheering supporters n Jerusalem that he will only join a coalition that pledges to remove the Hamas regime in Gaza.

Indicating a clear preference for Netanyahu, Lieberman said that he wants a right-wing government that would discontinue the policies of the current Kadima-led coalition.

"We must topple the Hamas regime," he said, rejecting any attempt to reach a new truce with the militant Islamic movement ruling Gaza. "No truce with Hamas, no negotiations with Hamas, direct or indirect."

A defeated Barak, the first to address his supporters after exit polls were published following the closing of polling stations at 10 pm (2000 GMT), nevertheless said he would continue to lead the party.

A top aide of Palestinian President Mahmoud Abbas, Saeb Erekat, voiced concern that the close results and shift to the right would create a "state of paralysis" in Israel, in which no new government "regardless of its structure, will be able to advance peace on the Palestinian or Syrian tracks."

"Any coalition government that rejects the two-state solution, continues with settlement activities and refuses signed agreements is not going to be a partner for us in peace," Erekat warned on the al- Jazeera satellite channel from Amman.

A Hamas spokesman in Gaza, Fawzi Barhoum, said that three "heads of radicalism and terror" - Livni, Netanyahu and Lieberman, had emerged as the winners of the Israel elections.

Despite widely expressed apathy, strong winds and intermittent downpours, voter turnout stood at 65.2 per cent, higher than expected and higher than in the last Israeli elections of March 2006.

The one-issue Pensioners Party, which won seven seats in the last elections and had been a desirable coalition partner, stood out as the one faction in the current Knesset that likely failed to reach the 3-per-cent threshold needed for entry.

A small Arab faction, Balad, which has three mandates in the outgoing House but also feared dropping out of Parliament, apparently survived.

Analysts said that the sharp gains for Lieberman in pre-election surveys had prompted more Arab Israelis to turn out to vote, after many had initially said they would boycott the election in protest of Israel's recent Gaza offensive.

The ultra-Orthodox Shas party, often a coalition maker or breaker, is predicted to lose mandates, from 12 in the outgoing to nine or 10 in the new Knesset. (dpa)