Despite the election setback, Abadi might still be granted a second term in office by parliament and on Monday he called on all political blocs to respect the results and suggested he was willing to work with Sadr to form a government.
Victory for the veteran nationalist's Saeroon or Marching Towards Reform alliance with Iraq's communists - pitched an anti-corruption outsider force - would be a slap in the face for Iraq's widely reviled ruling establishment.
Sadr, who is the victor with 53 seats out of a total of 329 in Baghdad's parliament, hinted at those with whom he intends to establish a new government comprised of "non-partisan technocrats".
Al-Sadr's list is leading the popular vote count, followed by a list linked to Iraq's predominantly Shiite paramilitary forces that fought alongside Iraq's army in the war against IS militants.
Abadi, who is the preferred candidate of the United States, looks set to come in third behind the Fatah (Conquest) alliance, led by former transport minister Hadi al-Amiri, who presides over the political wings of several Shia-led paramilitary forces. Despite a third place finish, Abadi could potentially still remain prime minister after the government coalition is formed.
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The protracted horse-trading ahead comes as surging tensions between the USA and Iran after Washington's withdrawal from a landmark nuclear deal with Tehran have sparked fears of a tug-of-war over Iraq. Once the results were announced hundreds of Sadr supporters gathered and chanted slogans against corruption of Iraq's political elite and Iran's influence in the country.
In a surprising pivot a year ago, Sadr visited regional Sunni powerhouse Saudi Arabia, with Riyadh looking to increase its involvement in Iraq.
An electoral alliance of Hashd-linked candidates, headed by militia commander Hadi al-Amiri, is now in second place in the election returns.
For his part, Sadr has made clear he is unwilling to compromise with Iran by forming a coalition with its main allies, Hadi Al-Amiri, leader of the Badr militia groups, and former prime minister Nuri Al-Maliki.