The Oscar-winning star was pictured being pushed from a New York cancer hospital in a wheelchair looking thin and frail.
'Paul didn't want to die in the hospital,' a source said. 'Joanne and his daughters are beside themselves with grief.'
The source, described as a 'close family friend' said that the star - who co-owns a motor racing team and has his own salad dressing brand - had spent the past few weeks getting his affairs in order.
It was claimed that some of Newman's actions had caused tension among of his children.
'He gave a prized car - a Ferrari with his racing number 82 on it - to a long-time pal,' the friend said. 'The sudden move angered his children. It's especially hard for them to come to grips with what's going on.
'The word they've been given is that he has only a few weeks to live,' Daily Mail reported.
Newman married Miss Woodward in 1958 and the couple have three daughters.
It was reported last month that he had been readying their oldest child, Nell, to take over his Newman's Own salad dressings company, the profits of which are given to a charitable foundation.
He also has two daughters from his first marriage to Jackie Witte.
Newman has so far declined to comment on his condition, apart from saying he is 'doing nicely'.
Rumours about his health surfaced in January. Three months ago, he withdrew from directing a production of Of Mice and Men in his home town of Westport, Connecticut.
He was pictured leaving the Weill Cornell Medical Centre in New York, which specialises in cancer treatment, in a wheelchair on July 31.
He retired from acting in 2006 after a 50-year career that included Butch Cassidy and the Sundance Kid (1969), The Sting (1971), The Hustler (1961), Hud (1963) and Cool Hand Luke (1967).
Newman was nominated for ten Oscars, winning best actor for his role in The Color of Money in 1986.
Remarking on his rather unlikely movie star life, a columnist remarked in March last, If good karma contributes to longevity, Newman should live to be 150. The actor donates all the profits from his Newman's Own products to thousands of charities - totaling $200 million so far. And especially today in New York, after Gov. Spitzer has resigned over a scandal with a hooker, we remember what the blue-eyed talent answered when asked if he'd ever cheated on his wife of many years, Joanne Woodward. "Why go out for hamburger," quipped Newman, "when you have steak at home?"