About 141,000 voters will decide the fate of the ruling nationalists, who reject a UN plan to reunite them with rival Greek Cypriots, or vote in pro-EU forces who have said they will negotiate a peace plan to ensure that a united Cyprus joins the EU next year.
Polling stations opened at 06:00 GMT and were to close at 16:00 GMT.
Unofficial results are expected before midnight.
The EU has made it clear it will admit only the internationally-recognised Greek Cypriot side if the 29-year-old division of the Mediterranean island is not ended by May 2004 when Cyprus joins the EU.
"Our fate is in our hands," trumpeted the island's major newspaper Kibris. "We are determining our destiny," another daily, Halkin Sesi, said.
Many analysts fear failure to reach a settlement will trigger tensions with Turkey, itself an EU membership candidate.
EU leaders meeting at a summit in Brussels on Friday told Ankara a settlement of the problem would "greatly facilitate" its membership aspirations.
Since 1974, the northern part of the island has been under Turkish troops, who intervened in response to a Greek Cypriot coup aimed at uniting Cyprus with Greece.
The extra edge to the election has sharply divided Turkish Cypriots and everybody on the island - from newspapers and TV channels to trade unions and civic groups - rooting for one side or the other.
However, Turkish Cypriot leader Rauf Denktash, the mentor of the europhobic ruling forces, has fuelled pre-election tensions by threatening to deny the opposition the prime minister's mandate even if it wins.
The opposition is capitalising on growing exasperation among Turkish Cypriots, who have long suffered international isolation and economic problems, while watching their Greek neighbours prosper.
"This is an election which will determine not only our own fate, but also the fate of Cyprus and Turkey's relations with Greece and the European Union," said Mustafa Akinci, head of the opposition Peace and Democracy Movement (BDH).
Mehmet Ali Talat, who leads the Republican Turkish Party (CTP), is confident of victory: "The status quo will be destroyed in the name of our children's future and in order to unblock Turkey's road to the EU. There is no other way of salvation."
The CTP, the BDH and a third partner, the Solution and EU Party, have agreed to cooperate if they win a majority in order to oust Denktash from his post of chief negotiator in peace talks with the Greek Cypriots.
A die-hard Turkish nationalist, Denktash rejected the UN peace plan in March arguing that it would spell the end of his statelet, reduce Turkey's influence in the island and lead to the displacement of thousands of Turkish Cypriots from territories that would be handed over to the Greek Cypriot side.
The plan envisages the island's reunification in a federation of two equal component states, territorial adjustments in favour of the Greek Cypriot majority and the departure of most Turkish troops from the north.