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The party, which has governed since 2019, gained the most votes but saw its weakest results in over a century.
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Taking 21.9% of the vote, the Social Democrats, who have governed since 2019, finished first in Tuesday's general election.
With 38 parliamentary seats, the party remains the largest by far, but that is not enough to claim victory alone.
Inside Denmark's parliament, Christiansborg, Social Democratic supporters cheered and applauded Frederiksen, as she told the crowd, "I'm sorry that we did not get more votes. I had also hoped for a better result."
"But there is nothing today that can make me sad that the Social Democrats have once again become the Danes' absolute favourite political party," she concluded.
Frederiksen still has a chance to stay in power for a third term, however Denmark is typically run by coalition governments, and so tough negotiations - which could take days or weeks - now loom.
Twelve different political parties were on the ballot paper, and this tightly contested race has come right down to the wire.
Claiming a total of 84 seats, the "red bloc" of left-wing parties have clinched a small lead over the "blue bloc" on the right, who have 77 seats combined.
Both blocs have fallen short of the 90 seats that are needed for a majority in Denmark's 179-seat parliament.
It is not yet clear which bloc will be able to build a majority.
"I have been responsible for this wonderful country for almost 7 years," Frederiksen continued. "I am still ready to take on responsibility as Denmark's prime minister."
However, the Moderates, a small party holding 14 seats in the middle, now have the power to act as kingmaker, and all eyes are on its leader, former Prime Minister Lars Lø
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