"We have a leader - Benjamin Netanyahu," acting party chairman Danny Naveh told a cheering crowd on Tuesday.
Netanyahu, a former premier who takes over a party shattered by Prime Minister Ariel Sharon's defection, thanked supporters for helping him win the primary.
"I came here tonight to tell you that as of now, the Likud is beginning the march back to reclaim the leadership of the country," he told supporters at Likud's Tel Aviv headquarters
His chief rival was Silvan Shalom, the Israeli foreign minister.
Shalom conceded defeat soon after to Netanyahu.
Shalom said he had called the former prime minister to congratulate him on his victory. "I told him I am at his disposal," he told reporters at his campaign headquarters.
Silvan Shalom called Netanyahu
to concede defeat
Party officials put the turnout at around 40% of the 130,000 members who were entitled to cast ballots.
Candidates needed to secure more than 40% of the vote to avoid the contest going into a second round.
Exit polls earlier showed Netanyahu had secured 47% of votes while Shalom won 32%.
The vote was held on Monday, a day after Sharon was admitted to hospital suffering from a mild stroke, although doctors said they expected the 77-year-old to be released and resume his duties on Tuesday.
The ultra-nationalist candidate Moshe Feiglin won 15% while Agriculture Minister Israel Katz trailed in fourth place with six percent.
The result will enable Netanyahu to take back the helm of the party which he led to victory in the 1996 general election before suffering a crushing defeat at the hands of the then Labour party leader Ehud Barak three years later.
The leadership vacancy arose after Netanyahu's arch rival Sharon dramatically resigned from Likud last month and announced the formation of a new centrist party called Kadima, having grown fed up with trying to battle hardliners who refused to forgive him for pulling Israel out of the Gaza Strip.
Netanyahu quit his cabinet post as finance minister in protest at the pullout in August and then tried to force Sharon into an early leadership contest, only losing a vote among members of the Likud's central committee by the narrowest of margins in September.
The 56-year-old, widely known as Bibi, directed the harshest rhetoric of his campaign at Sharon rather than his leadership rivals.
Sharon's exit from the Likud
necessitated the leadership vote
"A weak Israel, which beats a retreat and agrees to endless compromises under the pressure of terrorist attacks, is an Israel which will enjoy neither peace nor security," Netanyahu said at a press conference earlier this month in a clear dig at Sharon's decision to exit from Gaza.
He also pledged to put any further withdrawals from parts of the occupied West Bank to a nationwide referendum, in contrast to Sharon who rejected the idea of a plebiscite when leaving Gaza.
With Sharon as leader, Likud won 38 of the Knesset's 120 seats in January 2003 but polls have indicated that the party will now do well to get more than a dozen when the country as a whole votes on 28 March.
Kadima had been forecast to win up to 40 seats before Sharon suffered a mild stroke on Sunday.