The Labour Party came second with 20 seats as per projections but the surprise victors in the elections were the Sephardi ultra-Orthodox party, the Shas party, which won 13 becoming the third largest faction and the Pensioners' party which stunned everyone gaining seven seats.
Olmert's advisors today said that Shas and the Pensioners' Party will be partners in the new government.
The Likud party has met with its worst defeat winning only 11 seats, far below the figures the party had hoped and a far cry from the 38 seats it won under Ariel Sharon in 2003.
Even Avigdor Lieberman's Russian immigrant dominated faction Yisrael Beiteinu captured 12 seats pipping Likud to position itself as the chief opposition party to head the nationalist camp.
Kadima will set up its negotiating team and begin working to create Israel's next ruling coalition, the advisors said. The Labour party is likely to be the fourth party in the coalition.
With 99.5 per cent of the vote counting over, election observers had yet to count the votes of Israel Defence Forces soldiers, Israeli diplomats abroad, hospitalized patients, incarcerated citizens and Israeli mariners. These votes could alter the final results only slightly.
Kadima's victory comes only four months after its creation by Olmert's coma-stricken mentor Ariel Sharon, although it did not secure enough seats to govern alone.
The split mandate may prove a major hurdle in Olmert's plans to carry out evacuation from certain parts of the West Bank, through negotiations with Palestinians or unilaterally, as the Shas party has made clear that it is against any such move.
Olmert's separation plan could ultimately see Israel uproot around 70,000 settlers living in isolated West bank setlements in an echo of the momentous pullout of Jews from the Gaza Strip orchestrated by Sharon in 2005.