Attorney General Menachem Mazuz announced Tuesday that he had closed the dossier into the so-called Greek Island Affair and that Sharon would not face any charges.

"I have come to the conclusion that the dossier should be closed," said Mazuz in a televised statement. "The accumulated evidence was insufficient to envisage a conviction.

His decision also means that Sharon's son, Gilad, who was also implicated in the case, escapes any prospect of prosecution.

At the end of March, chief Israeli prosecutor Edna Arbel had recommended that Mazuz indict Sharon for allegedly receiving bribes from contractor David Appel.

Appel has already been indicted on charges of trying in 1998 to bribe then foreign minister Sharon through Sharon's son, Gilad, in exchange for their help in securing a major Greek property deal.

Sharon has repeatedly denied any wrongdoing.

Had Sharon been indicted, it would almost certainly heralded the end of his time as prime minister and a political career stretching back to the mid-1970s.

The decision clears the way for the main opposition Labour party to enter a new broad-based coalition government to help Sharon steer his controversial Gaza pullout plan through parliament.

Sharon lost his majority in the 120-seat parliament last week after the departure of four ministers from far right-wing parties who had been fiercely opposed to his disengagement plan.

He was only able to survive a no-confidence vote on his disengagement plan Monday night with the help of Labour, which abstained.

Former premier and Labour leader Shimon Peres, a supporter of the pullout, is widely expected to re-enter the government as foreign minister.