"Against all odds, we achieved a great victory for the Likud," Netanyahu told supporters, declaring victory even before final results were formally announced.
"I am proud of the people of Israel, who in the moment of truth knew how to distinguish between what is important and what is peripheral, and to insist on what is important," the 65-year-old premier, known for his hawkish views, said.
This is an impressive victory for the party that secured only 18 seats in the last parliamentary election.
In his first post-election night public appearance at the Western Wall here - the holiest site where Jews can pray, Netanyahu vowed to ensure the "welfare and security" of Israelis.
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"I will do everything I can to ensure the welfare and security of all the citizens of Israel, and God willing, we will succeed and prosper," he said, accompanied by wife Sara.
"I appreciate this decision of the citizens of Israel to elect me and my partners against all chances and against great forces," he said.
Netanyahu fought an all-out battle for a record fourth term against a spirited, united opposition based on a campaign revolving around no compromise attitude on Palestine's statehood.
Netanyahu, who has been in power for nine years over three terms, was pitted against 54-year-old Herzog, who had promised to repair ties with the Palestinians and the international community and also deal with middle class issues such as price rise.
Analysts said Netanyahu's campaign seems to have worked as Herzog's centrist Zionist Union was ahead in the recent opinion polls by about four seats in the Knesset.