Federal Liberal MP Craig Kelly has back-tracked on a threat to quit the Government if he loses his preselection fight in New South Wales.

Key points: Two Liberals challenging Craig Kelly for pre-selection

Two Liberals challenging Craig Kelly for pre-selection Mr Kelly has threatened to go to the crossbench if he loses party pre-selection

Mr Kelly has threatened to go to the crossbench if he loses party pre-selection Sources say it is is a factional stoush and he is being targeted by moderate Liberals because he is a conservative

Nominations for preselection have closed and the ABC understands two candidates will challenge Mr Kelly — the party's state vice president Kent Johns and local Liberal Michael Medway.

Mr Kelly is understood to have told local members that he will resign from the Coalition and sit as an independent, if the "higher powers that be" do not secure his nomination.

But he's now told Sky News he will remain a Liberal no matter what happens.

"If I cut myself blue blood will run through my veins," Mr Kelly said.

After the initial story about him potentially going to the crossbench, Mr Kelly moved to explain his closeness to the Liberal party by saying he had a copy of Sir Robert Menzies' Forgotten People speeches on his bedside table.

This is the second time that the moderate-backed Mr Johns has attempted to challenge Mr Kelly for preselection.

In 2016, Mr Johns withdrew his nomination after Prime Minister Malcolm Turnbull intervened.

While Mr Johns is now the Liberal's NSW vice-president, he was Labor mayor of Rockdale in Sydney more than 15 years ago.

If Mr Kelly quit the party, the Coalition would lose its nominal one-seat majority in the House of Representatives, meaning it would have to negotiate with the crossbench on each piece of legislation.

But Mr Kelly told the ABC he has the support of the Prime Minister and colleagues and was looking forward to putting his case to the preselectors in Hughes, which he has held since 2010.

Sources said the conservative backbencher was convinced he is being targeted by the moderates in the party and believed he had a good chance of retaining the seat as an independent, if he loses Liberal preselection.

It is understood that one of the aggravations in Hughes is Mr Kelly's advisor Frank Zumbo, who Liberals believe has too much influence over the MP.

Senior members of the Turnbull Government recently intervened to save the political career of Liberal MP Ann Sudmalis, whose preselection was under threat.