Though Sharon was not available for comments, an Israeli television channel said on Friday the move was aimed at facilitating the creation of a Palestinian state.
"There is such talk, but for now it only concerns settlements in Gaza. A lot could happen by next summer," sources in the Israeli Prime Minister's office said.
The decision to dismantle the settlements could mark a significant step forward towards implementing the US-backed 'road map,' that promises Palestinian statehood to end the region's long drawn strife.
"Sharon is once again poring over maps and planning. Where will the settlers go," a prominent political commentator with the Israeli television channel pondered, summing up the frenetic behind-the-scene activity in Sharon's office.
The television report comes amid renewed speculation that Sharon was planning a package of conciliatory moves towards Palestinians to quell domestic dissent over his hardline policies.
His latest initiative is also intended to bolster the new Palestinian Prime Minister Ahmad Quraya.
Sharon hinted at his new plan on Thursday while he addressed a business conference in Tel Aviv.
"We do not rule out unilateral steps towards Palestinians," he said.
"There is such talk, but for now it only concerns settlements in Gaza. A lot could happen by next summer"
Sharon has been under growing pressure from his domestic constituents for his inability to chart a path out of a three-year-old Palestinian uprising and the attendant violence.
Israel also came under unusually sharp criticism from US President George Bush for building what has come to be known as the "apartheid wall" in the West Bank.
A source said Sharon could unveil his new plans around the time of a summit expected in the coming days with Quraya.
"Sharon doesn’t like the diplomatic vacuum that has developed so he wants to change the situation," the source said.
His package of initiative could also include "humanitarian" easing of Israel's military blockade of Palestinian areas and also an army pullback from one or more West Bank cities.