"I would tell you, looking very closely at these results, the requirements of peace ... cannot be met by any form of coalition as a result of this election," Saeb Erekat, a senior Palestinian negotiator, said.
Although Kadima, led by Livni, the current foreign minister, narrrowly came out on top, the far-right appears to hold the key to forming a coalition government following the parliamentary elections.
Yisrael Beiteinu party, led by Avigdor Lieberman, who campaigned on a platform to deny citizenship to Israeli Arabs considered disloyal to the state, won 15 seats, pushing the traditionally dovish Labor into fourth place.
"Any form of government as a result of these elections will not accept the two-state solution, they will not accept the agreements signed, they will continue with the settlements activities and the incursions and the attacks," Erekat told Al Jazeera.
"I think we will conside them an un-partner."
'Terrorist troika'
The Hamas movement, which has de facto control of the Gaza Strip, said that Israeli voters had elected "extremists".
"This shows that the Zionist voters clearly start choosing the one who is most extreme in his speech, the one who wants war with the Palestinians," Fawzi Barhoum, a Hamas official, said.
"This troika, this trio of terrorism of Lieberman, Livni and Netanyahu, chose the dramatic development in Israeli society towards terror."
Speaking from Beirut, Osama Hamdan, another senior Hamas official, said "both sides are working against Hamas, against the Palestinians" but Netanyahu and the right-wing was doing it in a way "that cannot be defended".
He said that Livni was doing it in a "very soft way so it can be defended by the West and the United States".
Netanyahu, the leader of Likud, had criticised Ehud Olmert, the outgoing Israeli prime minister, for ending the recent 22-day offensive in the Gaza Strip before the Hamas-run government was effectively toppled.
More than 1,300 Palestinians, at least a third of them women and children, were killed during the war. At least thirteen Israelis, three of them civilians, died.
Peace progress
Peace talks under Livni have made little progress in recent years, but during campaigning she signalled that they would resume if she were made prime minister.
Israel maintains an economic blockade of the Gaza Strip, restricting the supply of basic necessities such as food and fuel.
Palestinian newspapers reflected the generally gloomy mood following the election.
"There will be a continuation of the political paralysis that has characterised the government of Ehud Olmert since the Lebanon war, and all the Arab and international initiatives will be shelved for the time being," Al-Quds newspaper said.
Al-Hayat Al-Jadida, the Palestinian Authority's daily, was even less enthusiastic, saying the only differences between the Israeli parties were their names.
'Same policies'
"The substance is the same: murders, settlements and destruction," it wrote.
"We expect a continuation of the same Israeli policies, renewed aggression in Gaza, the continuation of settlements in the West Bank and the demolition of houses in Jerusalem."
Mahmoud Abbas, the Palestinian president and head of the Fatah organisation, on Tuesday said that peace talks with Israel would only restart if the Israeli government commits to a freeze on the building of settlements in the occupied West Bank.
However, under the outgoing Kadima-led government the expansion of the Jewish settlements, which are illegal under international law, has continued.
Netanyahu has said he wants to increase the number of settlements built in the occupied West Bank.