But the choice of former Australian ambassador to Israel comes despite calls from Prime Minister Scott Morrison that it should be a female candidate.
David Sharma beat seven other candidates to win preselection for the ballot triggered by the resignation of former prime minister Malcolm Turnbull.
Mr Sharma faces a tough battle to retain Wentworth.
Mr Turnbull held the inner-Sydney seat on a primary vote of more than 60 per cent, but early polling indicates there will a big swing against the party.
Mr Sharma says he is up for the fight.
"I'm honoured to have been preselected as the Liberal candidate for the seat of Wentworth. We have a tough fight ahead of us to hold onto this seat, but I'll be throwing my all into it, and I believe we can retain it and retain a Liberal government in Canberra."
The leading candidate, Andrew Bragg, had pulled out of the contest earlier in the week after mounting pressure from federal parliamentary leaders, who wanted a female candidate.
Mr Bragg said at the time he hoped it would open the way for a woman.
Prime Minister Scott Morrison lobbied for the party to choose a female candidate, with Katherine O'Regan then the frontrunner.
But Ms O'Regan reportedly received less than 10 per cent in the first round of votes.
Mr Morrison says he will support David Sharma in the upcoming by-election despite his initial preference.
"I said very clearly I wanted the selectors of Wentworth to pick the best candidate. And that's what they've done. It was very clear on the reports back that I had from people who were there that Dave ... Dave ... you know, he smashed it. He absolutely smashed it. He demonstrated what I think the people of Wentworth will see over the next month or so before the by-election. So, you've always got to pick your best candidate. And that's what the party has done. And so I'm rapt to have Dave Sharma in Team ScoMo."
Mr Sharma is understood to have also come under pressure to withdraw from the contest.
But Mr Turnbull reportedly called Mr Sharma from New York, urging him to stay in the race.
The former prime minister has tweeted his congratulations to him.
Same-sex-marriage campaigner and City of Sydney councillor Kerryn Phelps is still considering whether to run for the seat as an independent.
Tamarama Surf Lifesaving president Tim Murray will run as the Labor candidate.
Polling commissioned by Andrew Bragg suggests a woman has a better chance of winning the October 20th by-election than a man.
It comes amid calls for gender quotas in the Liberal Party, with less than a quarter of Liberal MPs women.
Outgoing Liberal MP Julia Banks told parliament earlier this week quotas would improve the culture in the party as well as provide equal representation in parliament.
But Finance Minister Mathias Cormann has told Sky News there is no "women problem" in the Liberal Party.
"Right around Australia, we are preselecting outstanding women. We've got to continue to take every opportunity. But in Wentworth, quite rightly, the preselection delegates were asked to make a judgement who the best candidate was, and they determined that the best candidate was Dave Sharma. And we now all get behind helping him win, and that's the job at hand."
Claire Braund is executive director of Women on Boards, an organisation supporting women in achieving leadership positions in the workplace.
She says, while she is not surprised by David Sharma's selection, she is happy with the number of women who contested the position. "Clearly, they chose Dave Sharma from what was a very strong field. I think what was good there is that we had three women standing, so, in fact, there was 40 per cent of women standing for preselection. And that's really absolutely critical, because what we have to do is we have to ensure that, in fact, there are 40 per cent of females at least standing in every preselection for safe seats."
