The Social Democrats gained 15 seats in the 63-seat parliament - more than doubling its previous total - with 20.8 per cent of votes, state broadcaster RUV reported, making party leader Kristrun Frostadottir among the favourites to become prime minister.
"It very much depends on whether she can convince the president that she is the most likely to be able to form a coalition," Stefania Oskarsdottir, political scientist at the University of Iceland, said.
Frostadottir, 36, took over as Social Democratic party leader two years ago and has championed the Nordic welfare model, vowing to tackle a cost-of-living crisis sparked by high inflation and borrowing costs.
Alternatively, current prime minister and leader of the conservative Independence Party Bjarni Benediktsson could continue at the helm, Oskarsdottir said, adding that it could become difficult to form a coalition.
"It's obvious that three parties are needed to form a coalition and it might prove somewhat tricky," she said.
Benediktsson came second with 19.4 per cent of votes, gaining 14 seats after a late surge in support, while the Liberal Reform Party was third with 15.8 per cent and 11 seats.
Parties require 32 seats for a majority in the Althingi parliament.
"It seems that the Reform Party is critical in this because they have the option of joining a coalition with the Social Democrats and the People's Party, and they also have the option of forming a coalition with the Independence Party and the Centre Party," Oskarsdottir said.
The Left-Green Movement, part of the previous three-party ruling coalition and formerly led by Katrin Jakobsdottir before she stepped down as prime minister in April to run for president, failed to win any seats.
The Pirate Party also lost all of its seats, meaning only six parties will have a spot in parliament compared to eight parties previously.
The snap election was called last month after escalating coalition disagreements and public discontent over migration and energy and housing issues.
with AP
18°C