A coalition led by the African Party for the Independence of Guinea and Cape Verde (PAIGC) won 54 out of 102 seats, ahead of Embalo's Madem G15 party, which picked up 29, said Mpabi Cabi, acting head of the electoral commission.
The Party for Social Renewal (PRS) won 12 seats, the Workers' Party six seats and the Assembly of the People United one seat.
The small West African state has faced chronic instability in the shape of repeated coups and contested election results.
But Sunday's vote was given a clean bill of health by some 200 international monitors, who said they had not observed any major incident and described the ballot as "free, transparent and calm."
The outcome is a blow for Embalo, who came to power in 2019.
He dissolved the National Assembly in May 2022 after falling out with lawmakers, describing the legislature as a "space for guerrilla politics and plotting."
The outgoing assembly had been roughly divided equally between the leftwing PAIGC, Madem G15 and the PRS.
Analysts said Embalo's electoral setback was caused by rifts within his party and unpopularity with rural voters hit by falling prices of cashew nuts, a major source of income.
Under the constitution, the party which obtains the majority in parliament automatically gains the post of prime minister. Embalo is expected to announce the appointment shortly.
A crowd converged on PAIGC headquarters as soon as the results were announced, with many banging saucepans to express their joy.
"We have just achieved a historic victory. The only thing we ask this time is to let us govern the country," said Muniro Conte, spokesman for the victorious coalition, known as the Inclusive Alliance Platform (PAI)-Terra Ranka.
The former Portuguese colony of around two million people has suffered four military coups since 1974, most recently in 2012. An attempt to overthrow Embalo took place in February 2022.
The country's international partners have long been calling for a change to the constitution, which shares powers between the prime minister and the president and is seen a big factor in the instability.
Aftershocks from the war in Ukraine, which has driven up global food prices, as well as the Covid-19 pandemic have had a detrimental impact on the country's economy.
One-fifth of the population experiences food insecurity, according to the UN. Source: AFP
