Sharon's announcement on Monday, hours after he asked President Moshe Katsav to dissolve parliament and order elections, could free him of far-right constraints in pursuing an end to conflict with the Palestinians.
But opinion polls said the success of a Sharon-led centrist party was uncertain, and the former general, 77, could face an uphill battle against more established factions in elections, likely to take place in March.
Sharon said the new party, so far unnamed, would aim for peace between Israel and the Palestinians, but he ruled out further unilateral withdrawals from occupied land after his Gaza Strip pullout, which sparked a rebellion in Likud's ranks.
"We will work to set the permanent border of the nation while insisting on the dismantling of terrorist groups," Sharon said in his first public address since leaving Likud, which he co-founded three decades ago.
Sharon said he would stick to a US-backed peace "road map" that calls for an end to violence and charts steps towards creation of a Palestinian state, including the disarming of Palestinian resistance groups and an end to Jewish settlement expansion.
In a terse letter to Likud's acting chairman, Sharon wrote: "I am resigning from the party and forming a new one."
Later, Sharon said he took the decision "after many doubts".
Amir Peretz's Labour Party left
Sharon's governing coalition
Sharon announced that 14 people had joined him in the new group. He did not name them or say whether they were all from Likud.
Katsav said he would begin consultations immediately with political leaders on holding elections not constitutionally required until November 2006.
Legislators later approved a preliminary vote to dissolve parliament by 84-0. If three other votes are approved, possibly on Tuesday, then an election is automatically held within 90 days and there is no need for Katsav to call it.
Labour Party leader Amir Peretz said he favoured 28 March polls. The trade union chief's ouster of elder statesman Shimon Peres in a party vote on 10 November and vow to pull out of Sharon's coalition touched off the political turmoil.
"We do not intend to win the elections by catching the Likud with its pants down. We want to win because we have a better platform and we bring something else to the equation," Peretz told reporters.
If Katsav dissolves parliament or if it votes to dissolve itself, Sharon would remain as interim prime minister until a new one is elected.
Likud's acting chairman, Tzachi Hanegbi, said the party would choose a leader quickly. Former prime minister Benjamin Netanyahu, who quit as finance minister over the Gaza pullout, is a top contender.
Shimon Peres was ousted as
leader of the Labour Party
Political analyst Gerald Steinberg said Sharon was in a strong position as "the only credible leader with a national base". But he added: "On the other hand this is totally new territory and third parties have not done well in the past."
Palestinian negotiator Saeb Erikat compared the events to the eruption of a volcano. "I've never seen anything of this significance," he said. "I hope that when the dust settles, we will have a partner in Israel to go to the end game, toward the end of conflict, toward a final agreement."
The Palestinians also face political turmoil. The Palestinian resistance group Hamas is competing in 25 January parliament elections and poses a strong challenge to Palestinian President Mahmoud Abbas.
Sharon has said he would not hold talks with a Palestinian government that includes Hamas members.