Netanyahu's Likud party looked set to finish with a similar number of seats in parliament (35) to his main rival, ex-military chief Benny Gantz's centrist Blue and White alliance.
But with 97 percent of the vote counted, results showed Likud and other allied rightwing parties could garner around 65 seats in the 120-seat parliament.
Both Netanyahu and Gantz claimed victory after the initial exit surveys that gave Blue and White the most seats.
Netanyahu spoke in the early hours of Wednesday at Likud's post-election party in Tel Aviv and called it a "magnificent victory."
"It will be a rightwing government, but I will be prime minister for all," he said.
Earlier while addressing cheering supporters who waived Israeli flags at an event hall in Tel Aviv, Gantz called it an "historic day."
"The president must give us the task of forming the next government since we are the biggest party," he said after initial exit polls.
Gantz, a newcomer to politics, mounted a strong challenge to the veteran prime minister by brandishing his security credentials while pledging to undo damage he says Netanyahu has inflicted on the country with divisive politics.
Overall turnout was 61.3 percent compared to 62.4 percent at the same time in 2015 elections.