* Netanyahu's party seen losing seats, retaining power
* Iran issue to return to fore, Palestinians overshadowed
* Far-right, religious nationalist groups seen in coalition (Updates turnout)
By Crispian Balmer
JERUSALEM, Jan 22 (Reuters) - Israelis voted in surprisingly high numbers on Tuesday in an election expected to hand hawkish Prime Minister Benjamin Netanyahu a third term in office and bolster opponents of Palestinian statehood.
However, the strong turnout, coming off the back of a long, lacklustre election campaign, buoyed centre-left parties which had pinned their hopes on energizing an army of undecided voters against Netanyahu and his nationalist-religious allies.
"We managed to wake up Israel. Every extra percentage point of voter turn out is another hope for an upheaval," Tzipi Livni, a former foreign minister and leader of a small centrist group, wrote on Twitter, urging supporters to head to the polls.
The prime minister's Likud party, running alongside the ultra-nationalist Yisrael Beitenu group, looks certain to emerge as the biggest bloc in the 120-seat parliament, but a late surge by the opposition could complicate efforts to forge a coalition.
By 6 p.m. (1600 GMT), six hours before polls close, the Israeli election committee said turnout was 55.5 percent, up from 50.3 percent at the same time in 2009 and the highest level since 1999, when Netanyahu, serving his first term as prime minister, was defeated by then-Labour Party leader Ehud Barak.
A stream of opinion polls before the election had predicted an easy win for Netanyahu, who has said tackling Iran's nuclear ambitions would be his top priority if he won, shunting Palestinian peacemaking well down the agenda.
The final opinion polls on Friday showed his Likud-Beitenu group still on top, but losing some ground to the Jewish Home party, which opposes a Palestinian state and advocates annexing chunks of the occupied West Bank.
In a sign of concern over a possible last-minute burst from centrist parties, Netanyahu called on party faithful to vote.
"Go vote, and then go back to the cafes. Go vote so we can lead Israel because ... we don't really know how all of this is going to end," he said at his party headquarters in Israel's commercial capital, Tel Aviv.
Political sources said earlier that Netanyahu might approach centre-left parties after the ballot in an effort to broaden his coalition and present a more moderate face to worried allies.
British Foreign Secretary William Hague warned Israel on Tuesday it was losing international support, saying prospects for a two-state solution to the Israeli-Palestinian conflict were almost dead because of expanding Jewish settlements.
U.S.-brokered peace talks broke down in 2010 amid mutual acrimony. Since then Israel has accelerated construction in the West Bank and east Jerusalem - land the Palestinians want for their future state - much to the anger of Western partners.
Some 5.66 million Israelis are eligible to vote. Polling stations close at 10 p.m. (2000 GMT). Full results were due by Wednesday morning. Coalition talks could take several weeks.
Basking in warm winter sunshine, Israelis flocked to the polls throughout the day, although few seemed to believe that they could dent Netanyahu's seemingly impregnable poll lead.
"There is a king sitting on the throne in Israel and I wanted to dethrone him, but it looks like that won't happen," said retired teacher Yehudit Shimshi voting in central Israel.
No Israeli party has ever secured an absolute majority, meaning Netanyahu would always need coalition allies.
The former commando has traditionally looked to religious, conservative parties for backing and is widely expected to seek out the surprise star of the campaign, self-made millionaire Naftali Bennett, who heads the Jewish Home party.
A one-time political aide to Netanyahu and a former settler leader, Bennett's youthful dynamism has struck a chord amongst Israelis, disillusioned after years of failed peace initiatives.
Surveys suggest Bennett may take up to 14 seats, many at the expense of Likud-Beitenu, which was projected to win 32 in the last round of opinion polls published on Friday - 10 less than the two parties won in 2009 when they ran separate lists.
On the centre-left, the main opposition group, Labour, was seen taking 17 seats, although party leader Shelly Yachimovich clearly believed that the number might go higher.
"Incredible voter turnout percentages. The government can be changed!" she tweeted on Tuesday.
Tuesday's vote is the first in Israel since Arab uprisings swept the region two years ago, reshaping the Middle East.
Netanyahu has said the turbulence, which has brought Islamist governments to power in several countries long ruled by secularist autocrats, including neighbouring Egypt, shows the importance of strengthening national security.
If he wins on Tuesday, he will seek to put concerns about Iran swiftly back into focus. Netanyahu has said he will not let Tehran enrich enough uranium to make a single nuclear bomb - a threshold Israeli experts say could arrive as early as mid-2013.
Iran denies it is planning to build the bomb, and says Israel, widely believed to have the only nuclear arsenal in the Middle East, is the biggest threat to the region.
The issue has barely registered during the election campaign, with a poll in Haaretz newspaper on Friday saying 47 percent of Israelis thought social and economic issues were the most pressing concern, against just 10 percent who cited Iran.
One of the first problems to face the next government, which is unlikely to take power before the middle of next month at the earliest, is the stuttering economy.
Data last week showed the budget deficit rose to 4.2 percent of gross domestic product in 2012, double the original estimate, meaning spending cuts and tax hikes look certain. (Additional reporting by Ori Lewis, Jeffrey Heller and Tova Cohen; Editing by Alistair Lyon)