As the results of the Iowa Caucuses came in, the crowded Republican presidential race appeared to be narrowing down to a three-cornered contest with Marco Rubio coming a close third behind Cruz and Trump.
With almost all the votes counted, 45-year-old Cruz bagged 28 per cent of the total votes with a lead of over 5,500 votes against Trump's 24 per cent. Rubio was third with 23 per cent. Neurosurgeon-turned-politician Ben Carson was a distant fourth with nine per cent.
Clinton, 68, who is aiming to become the first woman president of the US, got 50 per cent of votes, with 99 per cent of the votes counted.
Sanders, who was trailing behind Clinton by more than 20 points several weeks ago, polled 49 per cent of the votes.
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In his first reaction after coming second in Iowa, Trump said, "We finished second. I am just honoured. I want to congratulate Ted (Cruz)."
The 69-year-old real estate tycoon said he never expected such a second place finish in Iowa when he started his campaign on June 16, 2015.
"We will go on to win the Republican nomination," Trump said and claimed that he will beat either of the potential Democratic nominee -- Clinton or Sanders.
Cruz, in his Iowa victory speech, said, "Tonight is the victory for courageous conservative. Iowa has send notice that the next Republican nominee or the president would not be chosen by the media, would not be chosen by the lobbyist, or by the Washingtonians...Would be chosen by the American people."
"Tonight Iowa has proclaimed to the world that morning is coming," he said amidst cheer from his supporters.
"I am a progressive to get things done for the people. Status quo is not good enough," she said with her husband and the former president Bill Clinton and daughter Chelsea Clinton standing by her side.
Earlier, Sanders had also claimed victory over Clinton but the electoral battle between them was going down to the wire.