As beaten rival Isaac Herzog ruled out forming a unity government, the White House gave a tepid acknowledgement of Netanyahu's victory, with President Barack Obama yet to call to congratulate him.
After a close-fought campaign, Netanyahu's rightwing Likud party confounded expectations and won 30 of the 120 seats in parliament, against 24 for Herzog's centre-left Zionist Union.
It was a victory Netanyahu himself described as "against all the odds", proving him once again to be Israel's master of political brinkmanship.
"I am moved by the weight of the responsibility the people of Israel have placed on my shoulders," he said on a visit to the Western Wall, the holiest site for Jewish prayer.
"I appreciate this decision, of the citizens of Israel, to elect me and my partners."
But the prospect of a new term for the hawkish premier, who lurched further to the right during campaigning, is likely to cast a long shadow over Israel's shattered relationship with the Palestinians and its strained ties with the US administration.
The Palestinians said the prospect of yet another Netanyahu government would spur them to accelerate their already-advanced campaign for statehood.
Their chief negotiator Saeb Erakat pledged to "speed up, pursue and intensify" all diplomatic efforts, including moves against Israelis for alleged war crimes at the International Criminal Court.
Palestinian president Mahmud Abbas's spokesman said he was ready to work with any Israeli government that supports statehood.
"It doesn't matter to us who the next prime minister of Israel is, what we expect from this government is to recognise the two-state solution," said Nabil Abu Rudeina.
In a last-minute campaign appeal to the far-right, Netanyahu had ruled out the establishment of a Palestinian state if reelected, seemingly upending decades of international consensus.
He also pledged to build thousands of homes for Jewish settlers in Arab east Jerusalem -- which Israel seized in the 1967 Six-Day War -- to prevent future concessions to the Palestinians.
On Wednesday the White House said it was "deeply concerned by divisive rhetoric" during the election, and that Obama still saw a two-state solution as "the best way to address those tensions".
But experts said Netanyahu could row back from his hardline positions.
Signup to our newsletter and follow us on Facebook and Twitter!
"I put much more stock in his actual behaviour and we know that he has agreed on numerous occasions to negotiate with the Palestinians on the basis of the 1967 borders," said Nathan Thrall of the International Crisis Group.
"He has never quite admitted that publicly but on several occasions he has done so in private."
EU foreign affairs chief Federica Mogherini called for a fresh start in Israeli-Palestinian ties.
"It's time to turn the page," she said.
"More than ever, bold leadership is required from all to reach a comprehensive, stable and viable settlement."
In his campaign Netanyahu argued he was the only one capable of protecting Israel from an Iranian nuclear threat, but Tehran dismissed his victory, saying the other Israeli political parties were no different.
UNITY GOVERNMENT RULED OUT
After Herzog conceded defeat, the Netanyahu camp set about forming a new government "within two to three weeks".
It said Netanyahu had already spoken with rightwing and religious party leaders whose support he will need to form a coalition.
But Herzog ruled out a broader unity government.
"Going into opposition is the only realistic option facing us," he said.
President Reuven Rivlin's office said he would start taking soundings from political party leaders from Sunday on who they would back to form the next government.
"It is the president's intention to open the round of consultations already at the beginning of next week, out of an effort to conclude the process of establishing the new government as early as possible," it said.
Under Israel's electoral system, the prime minister is not necessarily the leader of the party that gains most seats but whoever can build a coalition commanding a majority of at least 61 seats in parliament.
Netanyahu is likely to favour a narrow rightwing coalition but for that he will need the support of kingmaker Moshe Kahlon, a Likud defector whose newly formed centre-right Kulanu party won 10 seats.
The Joint List, which groups the main Arab parties, made a strong showing with 14 seats, making it the third-largest alliance in parliament.
The Central Elections Committee is expected to publish a final tally on Thursday, after an overnight count of about 200,000 absentee ballots which are highly unlikely to change the outcome, public radio said.