Analysts had predicted a win for the KMT, a development that could change Taiwan's relationship with China, which sees the territory as waiting for reunification.
The KMT has promised that closer ties with China will revive Taiwan's economy and open the door to new jobs.
But the DPP of Chen Shui-bian, the current president, says that Taiwan's sovereign identity is vital to its democracy.
|"Democracy is not a gift that just falls from the sky. Let this election be a victory for Taiwan, for democracy and for justice."|
Chen Shui-bian, Taiwan's president
Casting his vote in Taipei, the Taiwanese capital, Chen said: "Democracy is not a gift that just falls from the sky. Let this election be a victory for Taiwan, for democracy and for justice."
Voters were choosing from more than 400 candidates vying for 113 parliamentary seats, cut from 225.
Many voters have grown disillusioned with the independence-leaning DPP, which came to power in 2000, ending more than half a century of rule by the KMT.
One voter, Wu Hsiao-huu, a retired telecom engineer, said: "I am very disappointed at the DPP which has done poorly in the past eight years. The economy is terrible and people are struggling to make ends meet."
Chin Chen-lin, an 83-year-old Taipei resident, agreed: "Enough is enough. Look at what they did to our country. They had their chances and they did not really care for the people."
A win for the KMT in the elections would be a significant boost to Ma Ying-jeou, who will stand as the KMT candidate against Frank Hsieh, the DPP's successor to Chen, in the presidential election in March.
On the eve of elections, Ma called on supporters "to oust the party that likes to play tricks".
Taiwan's more than 17 million eligible voters also cast their ballots on Saturday on two referendums, one which asks whether parties should return ill-gotten assets to the government, and the other on whether parliament should investigate suspected wrongdoing by government officials.
Each measure needs votes from half the registered electorate to be valid.
In the build up to elections, both parties have been dogged by allegations of corruption, with Chen's wife on trial for misuse of public funds, his son-in-law convicted of insider trading and Annette Lu, the vice-president, indicted for corruption.
Last month, Ma was cleared of graft and breach of trust charges, clearing the way for him to run for the presidency, but prosecutors have decided to appeal the case to the Supreme Court.
Ahead of the elections, authorities cracked down on vote-buying, investigating nearly 11,000 people on suspicion of election-related bribery.
So far, 93 people have been indicted, according to the justice ministry.