A pro-independence coalition led by President Chen Shui-bian, which is tipped to make gains, is trying to wrest control of the legislature from a coalition which favours warmer ties with the mainland.
The 13,930 polling stations across the island opened at 8am (0000 GMT) on Saturday under stepped-up security after a van exploded outside the capital's train terminal two days ago. About 42,000 police were on the streets.
Polls will close at 4pm and counting will begin soon afterwards. Final results will be announced before 9pm.
Queues of voters including senior citizens on crutches formed early in the morning of a sunny winter day, with nearly 66% of the 16.5 million eligible voters expected to cast their ballots.
President Chen, who heads the Democratic Progressive Party (DPP), voted at a Taipei primary school, accompanied by his wheelchair-bound wife Wu Shu-chen.
"I ask our voters to rewrite history with their ballots," he said outside the polling station, which was heavily guarded amid reported bomb threats by anti-independence activists.
Chen wants a parliamentary majority to help him push for a new constitution to be adopted in 2008 after a referendum set for 2006.
Taiwanese President Chen
Shui-bian votes in Taipei
China sees a new constitution as equal to an independence declaration by the island which it claims as its territory, despite their split in 1949.
It has repeatedly threatened to invade if Taiwan makes formal moves to break away.
Chen says he will not push for formal independence. But at campaign rallies he urged voters to hand his Pan Green alliance a milestone victory to "write a new chapter in history".
The Pan Green, which includes Chen's DPP and the ultra pro-independence Taiwan Solidarity Union, has 100 seats in the 225-member parliament.
The Pan Blue - the former ruling Kuomintang Party (KMT), the People First Party and New Party, which favour close ties with China - currently hold 115 seats. Opposition leader Lien Chan from the KMT and his wife Fang Yu were also among the early voters.
A total of 386 candidates from seven parties and three non-partisan groups are vying for 176 seats in the legislature. The remaining 49 seats will be allocated to political groups based on their vote share.
Both camps claim they will win a tiny majority. Analysts and opinion polls predicted neither would be able to gain control although they expect a stronger showing for the pro-independence parties.
"I ask our voters to rewrite history with their ballots"
President Chen Shui-bian
A Taipei resident said he would choose a Pan Green candidate "to give President Chen more of a power base for constitutional reforms".
But a man who has business interests in China said: "Only a stronger presence by the Pan Blue can check Chen's independence drive which will put all I have worked for all my life in jeopardy."
An elderly voter in the central city of Taichung said he would consider emigrating to his hometown on the mainland if the Pan Green gains a majority.
The KMT lost its 51-year grip on power in 2000 when Chen won the presidential race.