Israeli Prime Minister Ariel Sharon has rejected as "despicable political libel" the allegation that he received an improper $1.5 million loan.

He told reporters on Wednesday that he would "refute this libel with documents and with facts".

The liberal Israeli daily Ha'aretz has alleged that the prime minister and his sons received the loan to cover debts from Mr Sharon's campaign for leadership of his Likud party in 1999.

I was very happy to help - it's what anybody would do for a friend Cyril Kern Businessman

Attorney General Elyakim Rubinstein has confirmed that the investigation is taking place, but said it would not be finished before the country's general election on 28 January.

Cyril Kern, the South African businessman who made the loan, rejected the allegation of impropriety as "character assassination".

A South African Justice Ministry spokesman confirmed that Attorney General Rubinstein's office had requested help with an investigation into the loan.

Old friend

Mr Kern, who has been a friend of Mr Sharon's since they fought together in Israel's 1948 war of independence, dismissed the notion that the loan was improper.

If Mr Sharon decides to keep quiet he will lose his legitimacy and be unworthy of leading Israel in its hour of crisis Amram Mitzna Labour challenger

"It's what anybody would do for a friend," he told Israel's Army Radio, adding that he had "never ever" had business interests in Israel.

Amram Mitzna, the head of the main opposition Labour party, had earlier challenged Mr Sharon to make a statement on the issue.

"If Mr Sharon decides to keep quiet he will lose his legitimacy and be unworthy of leading Israel in its hour of crisis," Ha'aretz quoted him as saying.

Poll dip

An opinion poll on Wednesday suggested that a substantial portion of the electorate shares Mr Mitzna's view.

Some 31% of Israelis said Mr Sharon was unfit to be prime minister given the allegations.

But 46% said he should keep his post.

The poll did not say what Israelis thought before the allegations surfaced.

The loan issue is the second corruption allegation to hit Likud recently.

There have been allegations of vote-buying during Likud party primaries before the election, and Mr Sharon sacked his deputy infrastructure minister when she declined to answer police questions.

Labour steady

The scandals have cut into Likud's lead over Labour at a time when the Israeli public seems to support Mr Sharon's hard line on security issues.

Mr Mitzna has not gained from the scandals

Before the scandals, Likud was expected to win as many as 41 seats in Israel's 120-member parliament.

But Labour, whose forecast has held steady at just over 20 seats in predictions for the next Knesset, has apparently not benefited from Likud's troubles.

Polls suggest that former Likud supporters are backing other right-wing parties - including religious ones - or the centrist Shinui party rather than going over to Labour.