US Edition With 75 per cent of the vote counted and the final tally predicted to give 73 seats to the conservative Liberal-National Coalition and 72 to Labour, neither party was likely to reach the 76 seats needed to claim victory in the 150-seat House of Representatives.
To form a minority government, both parties will now have to court the support of four independent MPs and one Greens party member in the House of Representatives, a process that could take days to finalise.
The result, which showed a 2.5 per cent swing against the government, threatens to remove Welsh-born Ms Gillard, the country's first female prime minister, from office. It will also hand Labour its first single-term loss since 1932, a turn of events that is expected to lead to serious recriminations within the Australian Left.
After a day of voting in locations as diverse as Sydney's affluent seaside suburbs and remote Aboriginal communities in the dusty Outback, politicians from both parties soon realised that they were facing a long and frustrating night that might not result in a clear win.
Speaking last night at a function in Melbourne that Labour had hoped would be a victory party, Ms Gillard, 48, told a crowd of party faithful that it could now take days before a result was known.
In typically cool and calculating style, she congratulated the independents and Greens who hold the balance of power in the new parliament, and then made a direct appeal for them to consider negotiating with Labour.
Rather more jubilant was Mr Abbott, a former trainee priest and journalist who had been almost written off as unelectable at the start of the campaign. His macho image, conservative Catholic views, and penchant for wearing tight-fitting "budgie smuggler" swimming trunks in public had led many commentators to write hin off as a brand of Aussie "bloke" no longer in tune with modern politics.
Mr Abbott defied expectations, shedding his reputation for being a loose cannon to emerge as a viable alternative prime minister. He courted popularity with blunt pledges to "stop the [asylum seeker] boats, pay back the debt and stop the big new taxes".
He also gained momentum in the crucial final days of the campaign with a display of stamina fitting of his background as a triathlete, covering 10 electorates in a 36-hour campaign marathon, and even fitting in time to play a round of tennis and buy his wife a bunch of flowers.
Mr Abbott, who had cast himself as the underdog throughout the campaign, appeared last night at a Coalition event in Sydney, where he and his family were greeted with raucous cheers of "Tony, Tony, Tony".
"We stand ready to govern and we stand ready to offer the Australian people stable, predictable and competent government," he told supporters. He said Labour had lost both its majority and legitimacy, and like Ms Gillard, issued an invite to independents to help him form a government.
Labour's failure to secure a majority was attributed to a voter backlash over the party's decision to remove its former leader Kevin Rudd, who swept to power on a wave of optimism in 2007 when he ousted John Howard after 11 years in office.
Public distaste at the internal coup against Mr Rudd last June was evident in large swings against the government in Queensland, the former prime minister's home state.
The Rudd affair cast a long shadow over Ms Gillard's election campaign, allowing her opponents to portray her as a ruthless political Macbeth rather than simply a successful career woman.
Last night, anger among Mr Rudd's allies within the party started to spill over.
"We shouldn't be on a knife-edge tonight and we shouldn't be losing colleagues all over the country," said Labour's Maxine McKew, who lost the seat of Bennelong. "Clearly you cannot have the removal of a Labour leader and a prime minister, and then two months later have an election and not have that play into the outcome."
Despite sheltering the country from the global financial crisis with a series of stimulus measures, the Labour-led government also failed to capitalise on its economic success. Labour's popularity was affected by a series of backdowns over policies that were key to the 2007 election "Ruddslide". Many Australians who had voted Labour in 2007 used the election to lodge a protest vote against the government's decision to scrap its ambitious carbon emissions trading scheme.
The prospect of a hung parliament will not affect Australia's commitment to the war in Afghanistan, which has bipartisan support, but could lead to uncertainty on the financial markets and a weakening of the Australian dollar. It could also lead to lengthy delays in new legislation passing through parliament.
The deadlock is likely to continue for several days until an estimated 800,000 postal votes are counted.
Then it will be down to four independents and one Green to decide who will hold the balance of power.
While three of the independents are former members of the National Party, the minor party in the opposition Coalition, there were no guarantees that they will side with Mr Abbott to form a government.
Ms Gillard will continue to lead the country in a caretaker capacity until the result is known.