Croatia's ruling conservative party, the Croatian Democratic Union (HDZ), has a narrow lead with most votes counted after the general election.
Both main parties claimed victory in the election
The electoral commission said the HDZ would have 61 MPs - five more than the opposition Social Democrat Party (SDP).
Both parties said they had begun talks with potential coalition partners to secure the parliamentary majority of 77 seats necessary to govern.
President Stipe Mesic will later decide who has the best chance of governing.
Both parties are committed to completing Croatia's entry into the European Union, which they hope to achieve by 2010, although the EU has warned them to do more to tackle corruption.
According to preliminary election results based on 96% of the ballots counted, the Croatian State Election Commission said the HDZ was in the lead with 34.78% of the vote.
The SDP trailed with 32.46%, followed by the Croatian People's Party, and the coalition between the Croatian Peasant Party (HSS) and Croatian Social Liberal Party (HSLS).
The results would leave the HDZ with 61 seats in the 153-seat parliament, the SDP with 56 seats, the HSS-HSLS coalition with eight and the HNS with seven.
Analysts say the 400,000-strong Croatian diaspora, based mainly in neighbouring Bosnia, could eventually swing the result in favour of the HDZ.
The outgoing prime minister and HDZ leader, Ivo Sanader, said his party's victory was "certain" in a speech on Sunday evening.
"Croatian voters have shown that they trust the HDZ and the policies we've been implementing in the last four years," said Mr Sanader.
On Monday, HDZ spokesman Ratko Macek told the state-run HINA news agency that talks with coalition partners were underway.
In spite of the preliminary results, SDP leader Zoran Milanovic said he was also confident of victory.
"We are immediately starting talks for forming the new government and I am sure we shall succeed," he said.
The main campaign issues in Sunday's election were corruption, the economy, and reforms needed to take Croatia into the European Union.