Mr Sharon has been in a coma since suffering a massive brain haemorrhage in early January.
His pneumonia marks the second time in a month that his condition has worsened.
In a statement the Tel Hashomer hospital in Tel Aviv said he has been given massive antibiotics.
But the hospital says there has been no change in the functioning of the brain tissue and no significant fall in vital signs.
Days numbered: Doctors
Israel's largest daily newspaper Yediot Aharonot has quoted unnamed doctors as saying that Mr Sharon's days are numbered.
"He is clinging to life with all his strength but a combination of pneumonia and kidney problems for a man in a coma and on respirators can be fatal," it quoted one of the doctors as saying.
Late Monday, the hospital announced that an MRI scan showed a deterioration in Sharon's cerebral tissue, a dramatic decrease in urine production and an inflammation of the lungs.
In late July, Mr Sharon was transferred to an intensive care unit after tests showed a deterioration in his kidneys and brain tissue.
He was moved from a Jerusalem hospital in May to Tel Hashomer for long-term treatment.
Uncertain times for Middle East
The deterioration in Mr Sharon's condition came on the day that a UN-brokered cessation of hostilities took effect between Israel and Hezbollah in Lebanon.
Mr Sharon oversaw Israel's 1982 invasion of Lebanon that led to an occupation of the country's south that only ended six years ago.
His stroke signalled a dramatic end to the career of the former general who was on course at the time for re-election as head of the new Kadima party.
He was succeeded temporarily by his close ally Ehud Olmert, who
subsequently led Kadima to a less than convincing election victory in March.
Mr Sharon had called the election last November on the same day he quit his long-time political home in the right-wing Likud party.
His decision followed frustration with hardliners who refused to forgive him for unilaterally pulling Israel out of the Gaza Strip.
He had earned a reputation as an arch-hawk before assuming the premiership in early 2001 after holding several cabinet positions.
At one stage, an official Israeli commission declared him unfit for public office over his role in a massacre by Christian militiamen of Palestinians in two Beirut refugee camps during Israel's 1982 invasion of Lebanon.
Mr Sharon was also largely blamed for sparking the second Palestinian uprising by visiting Jerusalem's disputed Al-Aqsa mosque compound in September 2000.
But he managed to revive his reputation internationally by ordering the first ever evacuation of Jews from occupied Palestinian territory last August.
Mr Sharon's disengagement from Gaza had been expected to allow Olmert to pull tens of thousands of Jewish settlers out of the West Bank later.
But those plans now appear to be dead in the water, following Israel's month-long offensive in Lebanon and ongoing operations in the Gaza Strip to retrieve an Israeli soldier captured by Palestinian militants on June 25.