Tuesday's challenge from his political nemesis, 22 years his junior, leaves Sharon between a rock and a hard place in a party left angry and embittered by his decision to abandon 25 illegal colonies built on occupied land.
"The Likud needs a leader who can unite the ranks, who can rebuild the ruins and take the Likud to victory," said Netanyahu announcing his bid in Tel Aviv.
A poll published among Likud members in the Haaretz newspaper last week gave Netanyahu a 47% rating against 31% for Sharon.
Other polls have suggested Sharon's best chance lies in splitting from Likud, the party he has been fundamental in shaping for the past 30 years, and striking out alone although no first-time party in Israel has ever won an election.
With polls giving Netanyahu a strong chance of victory, Sharon - one of Israel's most popular prime ministers - could be left with no option but to scrape together a new party to contest the next general elections.
"At the moment, Sharon's position in Likud is very, very bad and it's very difficult to see how he can extricate himself ... the whole political reality in Israel today is a nightmare," said the Israeli analyst Dan Schueftan.
The knife is likely to be twisted by Jewish settler leaders, still smarting at being unable to halt the "bulldozer" Sharon, their former ally, from demolishing their opposition to disengagement.
"At the moment, Sharon's position in Likud is very, very bad"
But analysts remain divided over how and whether Sharon - one of Israel's best tacticians and ultimate political survivors - can turn around his underdog status to victory.
Some predict he will call snap elections as quickly as possible to capitalise on his domestic and international popularity after Gaza.
Although Sharon has never been able to convince a majority of Likud members of the merits of his Gaza pullout, most Likud voters and most Israelis backed his withdrawal from the territory.
For Schueftan, no one, least of all Netanyahu, can stop the irreversible march towards further Israeli withdrawals from occupied Palestinian territory.
Under pressure from public opinion and Washington, desperate to brush over chaos in Iraq with progress on the Israeli-Palestinian front, he says Netanyahu "cannot not" make pullbacks from the West Bank if he wins.
"The Israeli electorate is extremely ungrateful. A lot of prime ministers have been broken-hearted and I'm sure that many, many people will judge him (Sharon) unfairly," said Schueftan.