“God willing, I will lead Likud to a big victory in the coming elections.”
Mr Netanyahu, who has led the party for the past 14 years, managed to hold onto the leadership tittle despite facing three corruption indictments.
He has denied the charges and described them as a politically motivated "witch-hunt".
Mr Sa'ar admitted defeat and said that he would back Mr Netanyahu in the general election, due in March.
Responding to the result on Twitter, he wrote: "I am content with my decision to have stood.
“Those who are unwilling to take a risk for what they believe in will never succeed.
"My colleagues and I will stand behind [Netanyahu] in campaigning for the Likud's success in the general elections.”
The vote to see who would lead the party into the next election was expected to be a test of the prime minister’s power at a time when he is facing bribery and corruption charges, as well as a third national election within a year.
Israel remains in political deadlock following elections held in April and September, which left Mr Netanyahu as the caretaker prime minister without a majority, while his challenger Benny Gantz failed to form a new government.
