Livni now takes on the challenge of putting together a coalition government in the next 42 days in order to become the country's first female prime minister in 34 years.
Livni, a moderate who has acted as the chief negotiator between Israel and the Palestinian territories, has long encouraged a cooperative government and said she will begin building her coalition right away.
Results of Wednesday's tight vote came as a surprise to exit pollsters who were predicting a double-digit lead for Livni. Instead, she won with only 43.1 percent of the vote over Mofaz's 42 percent -- a victory margin of just 431 votes out of some 40,000 votes cast.
"The national responsibility (bestowed) by the public brings me to approach this job with great awe," Livni said shortly after the results were announced, according to the Associated Press.
Wednesday's election was the first for the Kadima party since it was founded in 2005 by then-Prime Minister Ariel Sharon.
In the Israeli political system, narrow interest groups have a stake in power-sharing, and negotiating with multiple parties can present a formidable task when trying to form a coalition government.
"One of (Livni's) advisers said she out to know within a week if a deal was going to be possible," the BBC reported.
In the event that Livni cannot form a coalition government, Israeli President Shimon Peres can appoint someone else with trying or Israel can hold a general election on a few months.
Most expect Livni to complete her task and become the country's first female prime minister since Golda Meir in 1974. The former foreign minister has long pushed for negotiations with Syria, Iran and the Palestinian territories. According to the BBC, she "believes that it is in Israeli's interest to have a Palestinian state next door."
"She is said to be ready to give up territory, to move Jewish settlers, and if she wants a deal she will also have to allow Palestinians their own capital in Jerusalem," the BBC reported.
While negotiations may be difficult, many are eager to get Olmert out of office. Should Livni fail her task, Olmert, whose career has been smeared with a series of corruption charges, may be in power for up to another six months.
Former finance minister in Hamas, Omar Abdel Razeq, said he expects Livni to complete the task but doesn't expect relations to change between the warring territories.
"Everybody that monitors the Israeli political spectrum notices that there are no major differences in their stance regarding Palestinian rights," he said in an interview with Al Jazeera.