The deterioration in Mr Sharon's health comes at a delicate time in the region, with the Palestinians facing crucial parliamentary elections on January 25 and Israelis set to vote on March 28.
Finance Minister and Deputy Prime Minister Ehud Olmert has taken over the powers of the premier for the short term, and officials say the upcoming elections will go ahead.
Palestinian leaders have expressed fears that Mr Sharon's departure from politics would leave a massive void and could plunge the region into more bloodshed, a sentiment echoed by observers.
Arik Backar, foreign editor of Israel's Maariv newspaper said Mr Sharon’s absence, along with growing chaos in the Palestinian territories does not bode well for stability in the region.
“It was bad enough before Sharon went to hospital,” he told SBS World News Australia.
“The Palestinian Authority is all but broken down just a few weeks short of their own national parliamentary elections in Palestinian territories. Law and order is broken down there, so that complicates matters.
"Now, with the Israeli leadership in crisis, that could mean bad news for any moves to quieten down the conflict that’s been simmering here and look seriously at any future peace moves.”
As Mr Sharon fights for his life, Israelis politicians are grappling with the power vacuum left in his wake.
Leadership crisis
Mr Sharon left his Likud party in fury over its opposition to his controversial withdrawal from the Gaza Strip in October 2005 to set up his own centrist party Kadima, which was tipped to become the largest party after the election.
Mr Sharon’s sudden exit from politics is seen as a blow to Kadima's chances, but could also revive the prospects of Likud, now led by Mr Sharon's hawkish rival Benjamin Netanyahu.
Isabel Kirshner from The Jerusalem Report says Kadima has been left in a quandary by Mr Sharon’s sudden departure.
“Kadima, being so young, doesn’t even have institutions in place or a proper process or agreed procedure in place for how to choose a new leader or how to choose the candidates for a parliamentary election list,” she told SBS World News Australia.
“Most of (Kadima’s) popularity came with Sharon, but even without Sharon the centrist platform is a very popular one now. So Likud and Labour will still have their work cut out,” she said.
Mr Olmert could be one of the top contenders for prime minister in a March 28 general election.
An opinion poll published on the Haaretz website found that Kadima could still sweep the election, even if Mr Sharon is not at its head.
Another possible rival for the Kadima leadership is Justice Minister Tzipi Livni.
But the greatest victory would be with Shimon Peres running the party, the poll showed.
Palestinian fears
Analysts say the immediate priority for the United States, as a key mediator in Middle East negotiations, is ensuring smooth Palestinian legislative elections scheduled for January 25, which will also have far-reaching consequences for the peace process.
Palestinian leader Mahmoud Abbas has vowed that any turmoil in Israeli politics will not delay the Palestinian elections, but there is no denying that Mr Sharon’s departure will impact Palestinians.
Chief negotiator Saeb Erakat told SBS World News Australia that he feared the Palestinians could end up the unwitting victim of a post-Sharon power struggle and said he fears Israeli politics will now lurch to the right.
“I’m afraid that Netanayahu will be leading the campaign for the election. I’m afraid that the campaign will be more Palestinian blood, more settlements, more flats on the ground and that really worries me, that really worries me because we stand to pay the price,” Mr Erekat said.
Challenge for US
The United States also faces some hard choices in tackling the Middle East peace process.
The absence of Mr Sharon from the political scene has left Washington with no Israeli partner of his clout to push through deals with the Palestinians.
Some experts say US President George W Bush may now shy away from heavier involvement in peace efforts with Mr Sharon no longer on the scene, especially if the continuing political turmoil makes substantive gains doubtful.
US Secretary of State Condoleezza Rice expressed confidence on Thursday the Israeli people would remain committed to the peace process.
"I do believe that the desire for peace, the desire for a stable relationship between the Israelis and the Palestinians, is one that runs wide and deep in Israeli society," she told reporters.
But analysts such as Tamara Wittes, from the Brookings Institution, said such sentiment still required leadership and there was no obvious replacement for Mr Sharon and his close ties to Mr Bush.
"It's not at all clear who the Israeli political leader is who ... has the trust of the Israeli public to take what would be bold and probably divisive and painful steps in order to advance the peace process," she said.