Election setback for Benjamin Netanyahu, Yair Lapid emerges kingmaker
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Netanyahu gave a victory speech shortly after midnight, saying, "I'm proud to be your prime minister. I thank you for giving me a chance, for the third time, to lead the State of Israel. It is a great privilege and a great responsibility."
He vowed to form as broad a coalition as possible saying that 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 "responsible" pursuit of a "genuine peace" with the Palestinians.
The outcome of yesterday's poll largely showed that Israeli voters were more concerned about bread-and-butter issues over the ambitions of hardliners and largely ignored foreign policy issues like halting Iran's nuclear programme and Palestinian aspirations for statehood.
In his speech, Netanyahu said preventing Iran from developing nuclear weapons would remain his top priority. But internationally, he has repeatedly clashed with allies over his handling of the peace process.
Lapid has said he would only join a government committed to sweeping economic changes and a serious push to resume peace talks with the Palestinians.
Lapid was the first one to get a call from Netanyahu after exit polls forecast a strong show by his party.
Political analysts say coalition building will not be easy for Netanyahu.
The prime minister will need the support of Lapid, who wants to cut the privileges enjoyed by ultra-Orthodox Jews - about 10 per cent of Israel's population - but also the parties which have traditionally defended those privileges, they said.
The 19th Knesset has 31 seats for Likud - Beiteinu, Yesh Atid as the second biggest party with 19, Labour in third place at 15, with Shas and Bayit Yehudi at 11 seats each, the Central Elections Committee announced.
Religious United Torah Judaism party won seven seats, and former foreign minister Tzipi Livni's Hatnua (The Movement) Party and Meretz received six seats each.