In this paper, we address the problem of direction‐of‐arrival (DOA) estimation of multipath signals in the presence of gain‐phase uncertainties using an auxiliary source (AS) with uniform rectangular array. Based on the assumption that the waveform of the AS is a known prior, and the signal of the AS impinges on the array without multipath propagation, a two‐step algorithm is proposed to estimate the DOAs along with the fading coefficients and gain‐phase errors. First, a coarse estimation is obtained by extending the traditional spatial smoothing‐based ESPRIT algorithm. Second, in order to overcome the performance deterioration due to a reduction of the effective array aperture, an alternate iterative algorithm is proposed. Meanwhile, the relevant stochastic Cramér‐Rao bound (CRB) is also derived. Simulation results show that the proposed method is capable of approaching the stochastic CRB when the signal–noise ratio (SNR) of the AS is large enough and is greater than the SNR of the unknown source. © 2019 Institute of Electrical Engineers of Japan. Published by John Wiley & Sons, Inc.