Flying back to Israel from six days in New York where he won widespread praise at the UN General Assembly for his "courage" in pulling Israel out of the Gaza Strip after a 38-year occupation, Sharon returned to a political quagmire.
Although his unprecedented pullout won massive international support and backing from a majority of Israelis, Sharon's plan has left Likud in tatters, split between Sharon loyalists and its ultra-nationalist, settler-supporting right.
The leadership race, made inevitable when arch-rival Benjamin Netanyahu announced his candidacy last month, would be a major blow to Sharon's authority and the first time a sitting premier has been so challenged by his own party.
Israel's private Television 10, after Sharon's return home on Monday, said he had taken part in a New York private dinner where between 40 and 50 guests had each paid $10,000 towards financing his campaign against Netanyahu.
It said the sums were illegal as the primaries campaign had not opened and the maximum amount that could be collected from any couple under Israeli law was $7800.
Left-wing opposition MP Yossi Sarid called on the government's legal adviser, Menahem Mazuz, to take action against the premier.
Sharon's Gaza pullout won praise
abroad but bred party discontent
Recognising trouble ahead in the primaries, Sharon confessed to Jewish American leaders in New York on Sunday that he was up against the wall and criticised the party he helped to found in the 1970s.
"It is no secret that I have lost the majority in my party and I am in danger of being ousted and exiled.
"Unfortunately, it does not look like the party that I founded. The number of extremists and the pressure from outside the party are increasing," he said, in open reference to those plotting to unseat him.
"I do not understand how a ruling party that has another year to serve makes these mistakes," the prime minister added.
The latest opinion polls published on Monday showed that although Sharon is narrowing the gap against Netanyahu, he is unlikely to win the day over setting the date for the primaries, which his rival favours in November.
Former premier Netanyahu, the charismatic darling of Israel's right wants an early vote in order to maximise his chance of riding the tide of Likud discontent over Gaza.
Sharon, on the other hand, wants a vote early next year in order to give more time to clear the air and minimise the chance of general elections sooner than their scheduled time of November 2006.
In an attempt to reach out to the right of the party, Sharon reiterated his belief that by leaving Gaza, Israel can continue to expand and develop its key settlement blocs in the West Bank, such as Maale Adumim.
Some sources close to the prime minister have indicated that if Sharon loses, he will have no choice but to leave Likud and run on his own.
However Roni Baron, one of his main allies in parliament, denied the premier had any such plan up his sleeve.
"No one has heard the prime minister talking about a split or resignation," he told army radio.
"Those who wish or plan to resign do not make such efforts, do not conduct so many meetings."
The winner of the Likud race will automatically become the party's candidate for prime minister, so if Sharon loses, it could force early general elections.