We propose a generalized Lanczos method to generate the many-body basis states of quantum lattice models using tensor-network states (TNS). The ground-state wave function is represented as a linear superposition composed from a set of TNS generated by Lanczos iteration. This method improves significantly both the accuracy and the efficiency of the tensor-network algorithm and allows the ground state to be determined accurately using TNS with very small virtual bond dimensions. This state contains significantly more entanglement than each individual TNS, reproducing correctly the logarithmic size dependence of the entanglement entropy in a critical system. The method can be generalized to non-Hamiltonian systems and to the calculation of low-lying excited states, dynamical correlation functions, and other physical properties of strongly correlated systems.
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