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The conservative Independence Party led Iceland to financial collapse five years ago.
In a complete about-face, Iceland returned to power the conservatives who led the country into financial collapse five years ago.
With nearly all the ballots counted, the Independence Party took 26.7 percent of the vote and the Progressive Party 24.4 percent, both gaining 19 seats in the Althing, or parliament.
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The Social Democrats, which had imposed harsh austerity measures in recent years, were a distant third.
The Independence and Progressive parties are promising to ease those measures with tax cuts and debt relief and are likely to form a coalition government.
The parties also want to end the Atlantic island nation's European Union accession talks.
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"We will change Iceland for the better very fast in the coming months and years," the Progressive Party's leader, 38-year-old Sigmundur David Gunnlaugsson, told AFP.
The election was largely seen as a protest vote, and few members of the electorate had anything positive to say about their politicians as they left the polling booths on election day yesterday.
"The government was no good. They were elected for us, the people, and they didn't do anything for the nation," said Thordur Oskarsson, 73.
Either Dunnlaugsson or Independence Party leader Bjarni Benediktsson will likely be the country's next prime minister.
AFP contributed to this report.