After trailing most of the race, the ruling Kadima Party, headed by Israeli Foreign Minister Tzipi Livni, appears to have taken a narrow plurality in the 2009 Knesset race. It is expected to win 30 seats in the 120 member parliament. The right-wing Likud Party, which had been widely expected to claim victory, is projected to take 28 seats.
But Israel is a strange place, and the drama is just beginning. While Kadima (a centrist party that nonetheless is aligned with the "left" bloc) took a plurality of the vote, overall more voters went for right-leaning parties than their leftist peers. Third place behind Likud was the far-right Yisrael Beiteinu party, which will likely see 14-15 seats. The center-left Labor Party, long the dominant player in Israeli politics, will be the fourth largest party with 13 seats. Overall, the right-wing bloc is expected to win around 63 seats, and the left-wing bloc 57.
So if Livni wants to form a coalition, how will she do it? Assuming she holds the left together (far from certain -- particularly the Israeli Arab parties which are still justifiably furious that Kadima voted to ban them), there are three potential parties which might cross over from the right form a government. The largest, Likud, may also be the least likely, as Netanyahu has been indicating that he still expects to form a government with him at the helm comprising of the right-wing majority.
The other two candidates are the Sephardic/Mizrachi religious party Shas, and the secular far-right Yisrael Beiteinu. With these two, it's a case of choose your poison. Shas represents primarily the Sephardic and Mizrachi Jewish communities, who tend to be poorer and more traditional than their Ashkenazi citizens. They are mistrustful of European elitism, racism, and secularism. Politically, Shas is theocratic, extremely socially conservative, and corrupt. But it is relatively flexible on foreign affairs -- including negotiating a peaceful, two-state solution with the Palestinians.
Yisrael Beiteinu, by contrast, is extremely secular. It represents primarily the Russian immigrant community, which is highly educated but also likes to flirt with authoritarianism (it's been said that what they really want is an Israeli Vladimir Putin to lead them). They also came to Israel in direct response to brutal Russian anti-Semitic oppression, and they are very skeptical that non-Jews inside and outside of Israel will not treat them the same way. Many Yisrael Beiteinu voters are completely non-observant -- indeed, many of the Russian immigrants to Israel don't identify as Jewish at all. So from the perspective of reducing the theocratic side of Israeli life, YB is clearly superior to Shas -- indeed, in a lot of ways, the two parties are mortal enemies.
But this is counter-balanced by the fact that Yisrael Beiteinu is flatly racist -- demanding loyalty tests out of Israeli Arab citizens and condemning the appointment of a Muslim Arab minister as threatening "Israel's character as a Jewish state". Consequently, it is loathed by the Israeli Arab population in Israel and the Palestinians as well. Its "peace plan" involves ceding Israeli Arab areas to the future Palestinian state in exchange for settlement blocs -- a proposal highly unpopular with the Israeli Arab residents who would see their citizenship revoked.
If Livni can form a government, Shas may well be the more likely choice. I think Kadima is primed to think its first priority is the Israeli/Palestinian conflict, and Shas fits far better in the center-left mold than does Yisrael Beiteinu. Moreover, if Yisrael Beiteinu, which led the charge to ban the Israeli Arab parties, was invited into the coalition, those parties would undoubtedly refuse to join, rendering the coalition that much more precarious. But ultimately, both come with major problems, and some groups are going to get hosed. Even still, both are clearly superior to a Likud-led coalition joining the right with the far right, where everyone gets hosed.
So, fingers crossed.