Staking out the battleground for the right-wing power struggle triggered by Sharon's removal of settlers from Gaza, Netanyahu urged immediate building -- in defiance of Washington -- on a particularly sensitive area outside East Jerusalem.

"The time has come to build here and I will build here," Netanyahu told reporters on the rocky hillside between Jerusalem and the biggest West Bank settlement of Maale Adumim.

Sharon says Israel plans to build in the E1-block despite U.S. criticism and the fury of the Palestinians, who fear it would further cut them off from the holy city they seek as the capital of a state under an eventual peace deal.

A police station is to be built in the block, but no housing is planned there immediately.

Netanyahu declared his challenge to Sharon for leadership of their ruling Likud party on Tuesday, a step that could lead to elections earlier than the due date of November 2006 and is likely to keep any peacemaking with the Palestinians on hold.