The results released early on Friday showed Netanyahu's bloc won 53 seats in Tuesday's election.
The main opposition bloc, led by Gadi Eisenkot, won 48.
Arab-led parties secured the other 19.
Now parties must meet, bargain and seek a way to team up for at least 61 seats in the 120-member Knesset.
Netanyahu, Israel's longest-serving prime minister, remains in charge.
His main opponents would most likely need to partner with the Arab-led parties to replace him.
Underscoring the fraught path ahead, Avigdor Lieberman, the leader of a conservative anti-Netanyahu faction, on Friday appeared to rule out any partnership with Arab-led parties.
That alone would make it nearly impossible for Netanyahu's opponents to form a coalition to oust him.
Difficult decisions lie ahead: will the main opposition parties that campaigned hard to unseat Netanyahu make the politically sensitive choice to partner with Arab-led ones?
Or will they toss their vows aside to team up with Netanyahu in a potentially fractious unity government?
Israel largely shuts down on Friday for the Jewish Sabbath, and it was not clear who might be meeting with whom.
Israelis debated possible coalitions and challenges, as some expressed traditional wariness about Arab parties and others insisted it was time for Jewish-led parties to embrace them.
The election results still need to be certified and submitted to the president next Wednesday.
Then President Isaac Herzog will task someone with forming the new government.
That could be the leader of the party that received the most votes - Netanyahu - or whoever leaders of the various parties believe is best suited.
If multiple attempts to form a government fail, Israel faces a new election early next year.
Herzog this week said he will do everything in his power to avoid that scenario.
Even as coalition negotiations begin, the new Knesset is expected to be sworn in November 10.
Once it convenes, Eisenkot's bloc could join forces with the Arab parties to elect a new Knesset Speaker, giving them control over the parliamentary agenda and potentially allowing them to advance and pass legislation before a new government is formed.