The former Massachusetts governor edged out a win in the first caucus of the Republican race with 30,015 votes, as ex Pennsylvania senator Santorum came just eight votes behind with 30,007.
As the count nears its end, results show Ron Paul finishing in third place and veteran firebrand Newt Gingrich in fourth, with 13% of the vote.
Of the 25 delegates that were at stake in Iowa, Romney has won a projected 13 and Santorum the remaining 12. But with over 1,000 delegates needed to secure the nomination, predictions at this stage are impossible.
The Iowa caucuses aren not necessarily a good indication of the future winner; Senator John McCain came fourth in the 2008 contest but went on to win the nomination. And despite coming out on top in last year's straw-poll, Minnesota congresswoman Michele Bachmann finished last this time round.
It is the first round of voting for a Republican candidate in this year's US presidential election.
After a volatile warm-up lasting months, the world's longest political marathon has now started in earnest.
Front runner Mr Santorum had two words to announce to Americans as he took to a stage after the vote: "Game on!"
He added: "Thank you so much, Iowa. You, by standing up and not comprising, by being bold and leading with that responsibility you have as being the first state and taken the first step in taking back this country.
"Let me tell you, what wins in America is bold ideas, sharp contrasts and a plan that includes everyone from across the economic spectrum."
Mr Romney, encouraged by his vote, said: "I want to restore the principles that made America the hope of the earth."
He added: "Thank you so much for all your help and onwards to New Hampshire."
Ron Paul, speaking to cheering supporters after the figures were released, promised to continue the battle for the Republican ticket.
"We have brought issues front and centre and it won't be long before there will be an election up in New Hampshire and believe me, we are going to keep scoring like we have tonight," Mr Paul said.
"We have come out of an election where there is essentially three winners. I have no doubt we will raise the money and we have the supporters."
Mr Gingrich, who has been on the receiving end of negative advertising over what is seen as liabilities for being a veteran Washington insider, was subdued while speaking to supporters.
"Everywhere we went people were positive. I think we are at the beginning of an extraordinarily important campaign," Mr Gingrich said.
"The ultimate goal of this campaign has to be to replace Barack Obama and to get America back on the right track.
"One of the things that became obvious in the last few weeks in Iowa is that there has to be a great debate in the Republican party before a great debate with Barack Obama.
Iowa-born Michele Bachmann was in last place among the key candidates, just behind Texan Rick Perry but ahead of outsider Jon Huntsman.
It was a sharp turn for the Minnesota congresswoman after finishing in first place during the Iowa Republican party's summer straw poll.
However Mrs Bachmann remained determined to continue and push ahead as the battle moves beyond Iowa.
"I know I am the candidate who can beat Barack Obama," she said.
"Who knows there may be another Michelle in the White House."
Chairman of the party in Iowa, Matt Strawn, told Sky's Greg Milam that the vote outcome showed how much flux the party is in.
"The Republican party is still unsettled," Mr Strawn said.
He added: "There is never a dull moment in Iowa politics."
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