Deputy Prime Minister Soraya Saenz de Santamaria said the plan aimed to improve young people's job prospects at a time when unemployment among those aged 16 to 24 has surpassed 57 percent, and 25 percent of Spaniards drop out of school early.
"We need an urgent remodelling of the whole education system, because we cannot permit such levels of failure, dropping out and youth unemployment," she told a news conference.
The plan was approved at a cabinet meeting and is due to be debated in parliament, where it is likely to pass as the governing Popular Party holds an absolute majority.
Education Minister Jose Ignacio Wert called it "one of the most important reforms on the government's agenda".
Saenz said Spain's 25-percent school dropout rate is double that of other European Union countries. Nearly 24 percent of Spaniards aged 16 to 29 are neither working nor studying, she said.
Workers in the sector complain that the government in its crisis deficit-cutting drive has slashed annual education budgets by three billion euros.
Saenz responded that "investment in education has doubled over the past decade and so have the failures".
The reform will oblige pupils to opt at age 15 to follow either a vocational or academic course of study, and to pass new exams at each stage of their schooling.
Thousands of teachers and students demonstrated in the streets on May 9th demanding Wert's resignation over the proposals, which their unions say will create inequality between pupils.
"This law will be known as the one that broke the principle of equality in education in Spain," the opposition Socialists' deputy leader Elena Valenciano said .