Ms Halonen won 46.3 percent of the vote with 99.9 percent of ballots counted and will face Conservative Party leader Sauli Niinistoe, who won 24 percent, in the second round of voting on January 29.
Prime Minister Matti Vanhanen was in third place, and therefore eliminated, with 18.6 percent.
Ms Halonen, 62, Finland's first woman president, was heavily favoured to win a second six-year term in office, with some polls predicting she would win the election outright with up to 55 percent of the vote.
But Ms Halonen, a Social Democrat, showed no disappointment in her first reaction and said she had already begun to "rev up the engine" for the second round.
"I can't complain given that I have more votes than the next two put together," she said. "I'm starting from the first row. That's a good position."
Mr Niinistoe, putting on a brave face despite trailing Halonen by more than 22 points, retorted that "the second row is not bad either".
Ms Halonen also faced five other candidates in the election during which few policy differences emerged.
Reluctance to radical change
Candidates seemed reluctant to propose radical change in what is seen as one of the world's wealthiest and best-run countries.
Finland's economy is the envy of its European neighbours thanks to a shift to advanced technologies over the past decade. The World Economic Forum in 2005 named Finland the world's most competitive country for the third year running.
Nor were the main candidates at odds over foreign policy, including relations with the European Union, NATO and Russia, making this mainly a contest of personalities.
Neither Mr Vanhanen nor Mr Niinistoe had been able to mount a serious challenge to Ms Halonen, with the prime minister seen as lacking charisma and Mr Niinistoe failing to convince voters that he could do a better job.
Ms Halonen, affectionately referred to just as "Tarja" by many Finns, held several ministerial posts, including foreign affairs, before being elected president for the first time in 2000.
That same year the president's powers were considerably curtailed, even though the post retains much prestige and influence.
Ms Halonen is head of state and the armed forces, but is not supposed to play any role in domestic affairs. She runs foreign policy in close cooperation with the government.
Around a third of Finland's voters had already cast their ballots before Sunday especially in rural areas with overall turnout was around 74 percent.