Opinion polls had put the Democrats ahead, but the early results suggest it will be tough for Yudhoyono's party to win a strong mandate.
"It's a very disappointing performance for the Democrat Party at this stage," Kevin O'Rourke, a political risk analyst, said.
"Yudhoyono is going to have to rely on other parties as allies and this could mean another slow five years for institutional reform.
"Yudhoyono is probably most likely to make practical alliances in the next parliament, allying with Golkar on market-oriented issues, but allowing the Islamic-oriented parties to influence institutional reform issues."
A party or coalition needs to get 25 per cent of the national votes or a fifth of the total seats in parliament in order to field a candidate for the presidential vote in July.
Speaking at a news conference at his home in Bogor, following the announcement of the early results, Yudhoyono said his party would begin to look for coalition partners.
"We offer a partnership in the next government and of course a healthy, more healthy, relationship between the government and parliament," he said.
The elections were marred by violence in the eastern province of Papua where five people were killed. Pro-independence sentiment in the province runs high.
Indonesia took formal control of the region in a 1969 UN-sponsored vote by select tribal elders, widely seen as a sham, and the area has seen a long-running insurgency waged by pro-independence fighters.
There were also some complaints, including from the president, about irregularities with the vote, but generally polling was said to be peaceful.
"We've had these problems in every election we've held since 1999 and usually they will be dealt with, but because these irregularities are not major they will not affect the outcome of the elections," Endy Bayuni, the editor in chief of The Jakarta Post newspaper, told Al Jazeera.
Thirty-eight parties contested the elections, but opinion polls had suggested only three - the Democrats, PDI-P and Golkar - would end up with major blocs of votes.
But smaller parties, including many Islamic ones, could end up as "kingmakers" to form coalitions ahead of the presidential elections, if they crest the 2.5 per cent vote threshold needed to secure a place in parliament.
The one-day vote was a massive logistical exercise, capping a decade of democracy for Indonesia's more than 170 million eligible voters, with tens of thousands of security personnel deployed and about half a million polling stations spread across the archipelago.