The group, which will be called al-Watan, or Homeland, split from the Islamist Nour Party, an ally of President Mohamed Morsi's Muslim Brotherhood, though more religiously conservative, The Wall Street Journal reported Wednesday.
Emad Abdel Ghafour, the former head of the Nour Party, announced Tuesday he was heading the split joined by hundreds of defectors.
Ghafour said al-Watan will be an ally to a party led by former presidential candidate Hazem Salah Abu Ismail, who has a following of ultraconservative Islamist activists and champions the institution of Sharia, or strict Islamic law, the Journal reported.
Shadi Hamid, an Egypt expert at Brookings Doha Center, said Ismail "offers a more revolutionary form of Salafism."
"It's a fundamental difference in how to practice politics," he added.
The party split could strengthen more radical parties ahead of upcoming parliamentary elections, a date for which has not been determined, the Journal reported.
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