* Naftali Bennett's party set for 12 seats -exit polls
* Far-right party lags behind newly invigorated centrists
By Maayan Lubell
RAMAT GAN, Israel, Jan 23 (Reuters) - Young religious Israelis danced under showers of confetti after exit polls showed the far-right Jewish Home party winning more seats in parliament, but their leader, high-tech millionaire Naftali Bennett, had little to smile about.
"This is a disaster," one party activist told another as they gathered on the sidelines of the celebrations to reflect on a disappointing outcome to an election campaign in which the charismatic Bennet and his calls to annex West Bank land had generated worldwide headlines and hopes of greater power.
The star in the end turned out to be the centrist Yair Lapid, whose new Yesh Atid party finished a surprise second.
It wasn't all bad news for the party's leader, whose American-accented English invites comparisons with Prime Minister Benjamin Netanyahu's fluency in the language.
Bennett, the Israeli-born son of American immigrants, is a religious Jew and former settler leader. With a projected 12 seats in the 120-member parliament, he is also a likely partner in a Netanyahu-led coalition government.
But it was supposed to be bigger triumph for Bennett, like Netanyahu a former commando with a "can-do" persona.
Opinion polls during the campaign had predicted some 14 seats, and a third-place finish for Jewish Home behind Netanyahu's Likud-Beitenu list of parliamentary candidates.
Instead, the exit polls showed Jewish Home lagging behind the centre-left Labour Party and Yesh Atid (There is a Future), newly founded and led by former TV news anchor Lapid, 49.
Bennett, 40, nonetheless noted his party had, according to the exit polls, more than doubled the current number of its legislators in the outgoing parliament.
Surrounded by bodyguards and cheering fans, Bennett shot a wave of energy into the somewhat bewildered crowd in a victory speech: "Today we are back in the centre of the political map," he said.
The crowd at the campaign headquarters in the upmarket Ramat Gan suburb of Tel Aviv was comprised mainly of religious youths in their late teens. They shouted in unison: "We love Naftali."
Bennett's youthful dynamism has struck a chord amongst Israelis, disillusioned after years of failed peace initiatives, and has eroded Netanyahu's support base. Peace talks between Israel and the Palestinians broke down in 2010.
A government largely based around Netanyahu and Bennet, who was once an aide to the premier, would, many believed, have meant little concessions possible to the Palestinians. But if Netanyahu embraces the buoyant centre, things may be different.
The self-made millionaire says a Palestinian state would be suicide for Israel and advocates annexation of more than half the occupied West Bank, offering autonomy to Palestinians.
"There are no two narratives, no two truths, there is only one truth and it is simple. The Land of Israel belongs to the people of Israel," Bennett said, winning the strongest applause during his speech.
"Our generation's mission is to restore the Jewish soul to the people of Israel," he added. "A Jewish Spring is sweeping Israel."
Yoni Chetbon, one of the party's newly elected lawmakers, told Reuters he was not concerned at the weaker showing than had been anticipated: "I am calm about our coalition partnership with the Likud, because it is a natural one," he said.
Orit Struk, another new legislator, and settler leader from the West Bank city of Hebron, thought Netanyahu should see their party's growth in popularity as a sign "the people of Israel are sick and tired of negotiations with the Palestinians". (Editing by Jeffrey Heller and Alastair Macdonald)