With the majority of ballots from Sunday's vote counted, the eurosceptic League led by Matteo Salvini was leading the dominant right-wing coalition with 37 percent of the vote.
Salvini, who has promised to shut down Roma camps, deport hundreds of thousands of migrants and tackle the "danger" of Islam, said Monday he had the "right and duty" to govern Italy.
The League is closing in on 18 percent, overtaking the pre-election coalition leader and media mogul Silvio Berlusconi's Forza Italia (Go Italy) party, which has collapsed to 14 percent.
"Italians have chosen to take back control of the country from the insecurity and precariousness put in place by [centre-left Democratic Party leader Matteo] Renzi," Salvini told a press conference.
However, much depends on the anti-establishment Five Star Movement (M5S), which has drawn support from Italians fed up with traditional parties and a lack of economic opportunity and finished second with 32 percent.
"Everything will change," read the front page of Il Fatto Quotidiano, which like the M5S has railed against what it sees as the "corrupt" old parties.
But much depends what leader Luigi Di Maio does next.
"It's a great day, despite the rain," said Di Maio to reporters on Monday morning. "Indescribable."
Five Star League?
According to polling company YouTrend, the M5S is on for 231 seats in the lower house Chamber of Deputies and 115 in the upper house Senate, meaning that it could form a majority with either one of the League, Forza Italia and the Democratic Party (PD), which had a disastrous night.
PD leader Matteo Renzi looks doomed after his party dropped to 19 percent of the vote, which according to YouTrend could lead to a loss of a third of their seats in the Chamber and half in the Senate.
The M5S has always refused to form coalitions with other parties but having become the biggest single party, it has the chance to lead the country for the first time, and Di Maio has already moved to soften the fiery image given by party founder Beppe Grillo.
However, given its heated rivalry with the PD and Berlusconi, its most likely ally looks to be the eurosceptic League, a bizarre situation for Avellino-born Di Maio to be faced with given the League and Salvini's roots in the old secessionist, anti-southern Northern League.
Matteo Ricci, former vice president of the PD and the party's current mayor of Pesaro, insisted on state broadcaster Rai that there was no chance of the PD helping the M5S forming a government.
"The ony ally with whom the M5S can form a government is Matteo Salvini, everyone knows it, that's the only option for them with this parliament," Ricci said.
Should the M5S stick to its old principles and not try to form a coalition, it would leave the path completely free for Salvini.
'Bad night' for EU
The boost for far-right and populist parties has drawn comparisons to Britain's vote to leave the European Union and the rise of US President Donald Trump.
Brexit firebrand Nigel Farage congratulated the Five Star Movement, his allies in the European Parliament, "for topping the poll" as by far Italy's biggest single party.
The possible alliance between the League and Five Star will also delight former Trump advisor Steve Bannon, who called that coalition "the ultimate dream".
Resentment at the hundreds of thousands of migrant arrivals in Italy in recent years fired up the campaign, along with frustration about social inequalities.
"These are historic results," Giancarlo Giorgetti, deputy head of the League, told reporters in Milan.
Alessandro Di Battista of the Five Star Movement, said: "Everyone is going to have to come and speak to us".
Andrea Marcucci, one of the ravaged PD's lawmakers, said: "The populists have won and the Democratic Party has lost".
Maurizio Martina and PD president Matteo Orfini speak to press. Photo: Tiziana Fabi/AFP
Berlusconi, a flamboyant three-time former prime minister, is on the ropes after his electoral flop, which means European Parliament President Antonio Tajani's candidacy as prime minister is likely dead.
The billionaire, who won his first election in 1994, has returned to the limelight at the age of 81 despite a career overshadowed by sex scandals and legal woes, but has turned out to be the big loser alongside Renzi.
The election campaign was a gloomy one marred by clashes between far-right and anti-fascist activists, as well as a racist shooting spree by an extreme-right sympathizer last month.
In the event of a stalemate, President Sergio Mattarella will have the key role of choosing a prime ministerial nominee who could command a majority in parliament but negotiations could take weeks or even months.
"The verdict in Italy is always the same: the country is in constant instability. Being ungovernable has become endemic," said Claudio Tito, columnist for La Repubblica.
By Terry Daley