Internal political divisions are likely to stymie the next Israeli government's peacemaking with the Palestinians, whoever leads it, leaving US President Barack Obama's Middle East policy in limbo.
Centrist Tzipi Livni, who as Foreign Minister held peace talks with the Palestinians, led exit polls and the early count after Tuesday's election, but her Kadima party's two-seat margin over rightist Benjamin Netanyahu was too small to tell who would be prime minister.
Western diplomats and analysts said the growing strength of right-wing parties in Israel made it almost impossible for the new government to make the compromises needed for peace, despite Mr Obama's commitment to bringing the two sides together after Israel's war against the Hamas-ruled Gaza Strip last month.
The obstacles facing the peace process on the Palestinian side are just as daunting, and possibly harder to handle, since the Hamas Islamists won a 2006 parliamentary election and seized control of the Gaza Strip in 2007 after routing forces loyal to Western-backed President Mahmoud Abbas.
Like those Israeli leaders who want a two-state solution, Mr Abbas, whose secular Fatah faction now runs only the Israeli-occupied West Bank, has seen his public support eroding.
His fight with Hamas for legitimacy among Palestinians, his failure to deliver a promised statehood deal in talks with outgoing Israeli Prime Minister Ehud Olmert, and his response to the Gaza war have all sapped his strength.
"In a way, the Obama administration is going to inherit the worst of both worlds," said Aaron David Miller, a former US peace mediator and the author of The Much Too Promised Land: America's Elusive Search for Arab-Israeli Peace.
"They have already inherited a dysfunctional Palestinian house, made worse by Gaza, and now what they are inheriting is a dysfunctional Israeli house where the Prime Minister is not going to be able to make the kinds of bold, tough choices required to move forward," he added.
Top Palestinian negotiator Saeb Erekat underscored the sense of hopelessness. Even if Mrs Livni, his negotiating partner, comes out on top, Mr Erekat said, "the next Israeli government will be unable to deliver the requirements of peace" - a crackdown on Jewish settlement building and the easing of Israeli restrictions that have stunted the Palestinian economy.
The electoral maths speaks for itself. Poll forecasts after voting ended show that Mrs Livni's centrist Kadima and left-wing parties would hold only 56 seats in the 120-seat parliament, while a right-wing bloc would control 64, enough to govern.
That means emboldened far-right parties like Yisrael Beiteinu will have the power to bring down fragile coalitions. What President Obama can do, Western officials and analysts say, is work to prevent further Israeli-Palestinian violence, maintain Israeli cooperation with Mr Abbas's government and encourage the Palestinians to settle their differences while looking for opportunities to push forward with the peace process.
It won't be easy. While Mrs Livni has vowed to restart the political track following Israel's 22-day offensive in Gaza, there are doubts about her ability to hold serious discussions on territorial concessions, which Abbas needs to survive. If she joins forces with rightists, simply talking about ceding holy land could cut short her government's life.
If Mr Netanyahu forms a government, it could be even harder.
During the campaign, Mr Netanyahu ruled out freezing Jewish settlement growth in the occupied West Bank, a long-standing Western demand that Mr Obama is expected to push Israel to act on.
Mr Netanyahu has also vowed never to cede Arab East Jerusalem to the Palestinians or the Golan Heights to Syria, undermining the foundations of a two-state solution and a regional Arab peace initiative that Mr Obama appears to have embraced.