Businessman and Indian community leader Dinesh Gourisetty won the top spot on the Liberal's Western Metropolitan ticket at the party's Melbourne headquarters on Sunday.
With the support of the party's moderate wing, Mr Gourisetty defeated outspoken MP Moira Deeming and fellow upper house MP Trung Luu.
In a stunning turn on Monday, a Liberal source confirmed Mr Gourisetty withdrew his candidacy.
Kashyap Patel pleaded guilty in the Victorian County Court in 2024 to grooming of a child under 16 years, transmitting indecent communication to a person under 16 and sexually assaulting a child under 16.
Patel was sentenced to nine months in prison and a two-year community correction order.
In his sentencing remarks, Judge Peter Rozen KC cited a character reference provided for Patel by Mr Gourisetty, who was described as a "good friend" of Patel.
Following the revelations, Opposition Leader Jess Wilson said Mr Gourisetty was "not welcome on my team".
"I have made that clear to the party organisation this morning," she said in a statement.
Mr Gourisetty has been contacted for comment.
The vote that saw Mr Gourisetty win the top spot on the state party's ticket had not yet been endorsed by the state executive.
Mrs Deeming, who declined to comment on Monday, did not put her hand up for a second position on the ticket.
The party's state executive will need to decide whether it begins the preselection process anew, leaving the door ajar for Mrs Deeming to claim the top spot ahead of the November election.
Mrs Deeming has made headlines since she was preselected by the party in 2022.
The former high school teacher was suspended after she attended a 2023 Let Women Speak rally gatecrashed by neo-Nazis.
She was later expelled from the Liberal party room after she threatened legal action against then leader John Pesutto, who was ultimately found to have defamed her by implying she was associated with neo-Nazis and ordered to pay $2.3 million in legal costs.
Mrs Deeming was welcomed back into the parliamentary party in December 2024 and named former leader Brad Battin's representative for the western suburbs.
She offered to defer some of Mr Pesutto's legal bill in exchange for conditions including her preselection, but the proposition was rebuffed.
The state Liberals' administrative committee agreed to lend Mr Pesutto $1.55 million to settle his debt to Mrs Deeming and avoid bankruptcy.
The loan prompted an ongoing legal challenge from a group of breakaway Liberals.
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