Prime Minister Ariel Sharon on Thursday hotly denied charges of corruption that have hurt his re-election chances in Jan. 28 elections.

Also Thursday, Israel's Supreme Court restored the candidacy of two Arab legislators in a landmark ruling that is likely to bolster the strength of anti-Sharon factions in parliament.

At a hastily-called news conference, Sharon accused his main opponent, Amram Mitzna and Mitzna's Labor Party, of trying to bring down his government with "contemptible libel."

At issue is a Justice Ministry document, made public by the Haaretz daily, outlining a police investigation into a $1.5 million loan Sharon's sons received from a South Africa-based businessman to cover payback of improper campaign funds from a previous election.

Israel's attorney general, Elyakim Rubinstein, confirmed Wednesday that a police investigation is under way involving the transfer of the money a year ago to bank accounts in the names of Sharon's sons, and that Israel had asked for South African assistance.

Visibly angry, Sharon insisted that nothing improper was done. Instead, he said, Labor was acting "irresponsibly," responding to its own inability to gain public support by orchestrating an escalating scandal implicating Sharon and his sons.

Sharon said he would be willing to face police interrogation. "Let them come and ask their questions," he said. "I have nothing to hide."

The loan allegations followed charges of bribery, payoffs and shakedowns in Likud's internal elections to choose its candidates for parliament. Sharon dismissed a deputy minister who refused to answer police questions about the affair, which had already cost the party some support.

Polls published in newspapers Thursday indicated that backing for Sharon's Likud Party has dropped dramatically, to the point that Sharon's re-election, once considered automatic, is no longer assured.

Israeli voters pick a party, and the party leader able to stitch together a majority coalition becomes premier. The drop in support for the Likud and its allies would make Sharon's task much more difficult.

Thursday's Supreme Court ruling, meanwhile, was expected to help dam a tidal wave of resentment by Israel's 1.2 million Arab citizens — more than a sixth of the population — against the Jewish state.

A panel of 11 justices overturned a decision two weeks ago by the Central Election Commission to disqualify Arab legislators Azmi Bishara and Ahmed Tibi on grounds they sided with Israel's enemies.

The high court ruled unanimously on Tibi and 7-4 on Bishara, issuing the decision in writing. The judges' arguments were not immediately released.

Bishara hailed the decision as a victory for Israeli democracy and said it would help reassure the country's Arab citizens. "Arabs in Israel will have a feeling they are not orphans of Israeli democracy, they are citizens of Israel," Bishara said.

The legislator said he expected a high turnout by Arab voters in the upcoming election, and said this could reduce Sharon's chances to be re-elected. A strong showing by Arab parties could deprive Israel's right wing of a majority in parliament.

Many of Israel's Arab citizens saw the case as a watershed in their already deeply troubled relations with the Jewish majority. Israeli Arabs have long complained of discrimination by Israeli governments, and the disqualification of Bishara and Tibi was seen as an attempt to curb the Arab voice.

The Central Election Commission had accused Bishara of inciting violence against Israel, including during a trip to Syria where he seemed to praise Lebanese Hezbollah guerrillas, while Tibi allegedly sided with Yasser Arafat and his Palestinian Authority against the Jewish state. Both legislators denied the allegations, saying they oppose violence, and were simply criticizing Israeli government policy.

In other decisions, the high court upheld the candidacy of Baruch Marzel, a well-known Jewish ultranationalist who was once a leading figure in Kach, a movement founded by U.S.-born Rabbi Meir Kahane and later outlawed as racist.

A survey in the Haaretz daily showed Likud winning 27 seats, down from about 40 in November. Labor was up from 22 to 24. According to the Haaretz poll, Likud and its allies would win only 61 seats, a bare majority, down from 67 in November, while Labor and its partners would receive 40 seats, up from 27. Centrist parties — Shinui and Am Echad — get 19, the poll predicted. The Haaretz-Dialogue poll questioned 521 eligible voters and quoted a margin of error of 4.3 percentage points.