Israeli Finance Minister Benjamin Netanyahu resigned in protest today as the cabinet approved the first phase of evacuations from settlements in the occupied Gaza Strip.
The resignation of Mr Netanyahu, Mr Sharon's main rival in the right-wing Likud party, sent local markets reeling and showed the depth of division in the cabinet over the plan for "disengagement" from conflict with the Palestinians.
Israeli Prime Minister Ariel Sharon (L) and Finance Minister Benjamin Netanyahu during a meeting last January
But the departure of the highest-ranking minister yet to go over the pullout was too late to prevent approval for the forced evacuations of settlers, due to start after August 15th.
The cabinet voted by 17 to five to back the first phase of the initiative - removal of the settlements of Kfar Darom, Netzarim and Morag, isolated enclaves where resistance is likely to be among the strongest.
Mr Netanyahu said his resignation letter counted as a vote against. "A unilateral withdrawal without anything in return is not the way," he said. "I cannot be part of this irresponsible move that divides the people and harms Israel's security and will in the future pose a danger for the wholeness of Jerusalem."
Right wing opponents see the plan as a capitulation to a Palestinian uprising, as well as setting a precedent for ceding land captured in the 1967 war - which also includes the West Bank and Arab East Jerusalem.
Mr Netanyahu had long opposed removing all 21 settlements in the Gaza Strip and four of 120 in the West Bank despite the fact that it has the support of most Israelis.
Israel's blue chip stock index closed 5.2 per cent lower on news of the departure of Mr Netanyahu, who made himself a darling of business for cutting taxes and social benefits as well as other reforms that helped lift Israel out of recession.
Markets nonetheless favour the withdrawal, the first time Israel would remove settlements from land where Palestinians want a state and touted by Washington as a possible step to reviving talks on a "road map" for peace in the Middle East.
There was no immediate comment on Mr Netanyahu's resignation from Mr Sharon's office.
The Yesha settler council commended him "for showing national responsibility and leadership, for deciding not to lend his hand in the uprooting of Jewish communities to encourage terror."
Settlers have watched their political options for defeating the pullout dwindle, while the fatal shooting of four Israeli Arabs by a radical opponent last week came as another blow to the movement - even though it condemned the attack.
Mr Netanyahu (55), himself a former prime minister, is widely expected to challenge Mr Sharon's leadership at some stage after the pullout and could benefit from the support of opponents of the Gaza pullout. Mr Sharon is 77.