Jerusalem ? In a sharp escalation of a long-standing corruption scandal surrounding Ariel Sharon, the state prosecutor has recommended that the prime minister be indicted, Israeli media reported Saturday.

If the legal proceedings were to move forward against Sharon, who is accused of accepting bribes from an Israeli businessman, they could lead to the 76-year-old leader’s ouster from office at a delicate moment in foundering Middle East peace efforts.

But the indictment reportedly drafted by the prosecutor, Edna Arbel, would have to be approved by Israel’s newly appointed attorney general, Menachem Mazuz, a move that is far from certain.

The deepening imbroglio about the prime minister’s past financial dealings comes at a time when his domestic approval ratings have been sagging, his relations with the Bush administration are fraught with tension, and Palestinians across the political spectrum are outraged about Israel’s assassination last week of Sheik Ahmed Yassin, the founder and spiritual leader of the radical group Hamas.

Although public opinion surveys have suggested that most Israelis approved of the “targeted killing” of Yassin, who was a driving force behind Hamas’ campaign of suicide bombings during the 42-month-old Palestinian uprising, Israelis are also bracing for a ferocious new wave of retaliatory attacks by Palestinian militants in Israeli cities and towns.

Israeli law is ambiguous on the question of whether an indictment would force Sharon to step down. Legal scholars have said it would be possible, although extremely difficult politically, for a sitting prime minister to remain in office in the event of indictment. Judicial authorities said it could take Mazuz as long as a month to act on the recommendation.

The prime minister, who denies any wrongdoing, has insisted that he wouldn’t step down.

The financial scandal centers on Sharon’s dealings during the late 1990s with Israeli businessman and Likud activist David Appel, who has been charged with bribery. Appel is accused of making payments to Sharon’s son Gilad, and of providing political and financial assistance to Sharon when he was running for the leadership of his party.

Appel allegedly acted in exchange for favorable treatment in a failed financial scheme to develop a resort.