Prime Minister Mariano Rajoy declined to rule out altering Spain's 2011 ban on smoking in public places in favour of the Eurovegas casino.
"No decision has been taken on the matter, but we think the casino is a good project because it is going to create lots of jobs," Rajoy said.
He confirmed that he had met recently with Sheldon Adelson, the US billionaire behind the project who demands that customers be allowed to smoke there.
The conservative regional government of Madrid is pushing to allow smoking in Eurovegas, welcoming the project as the economic crisis in Spain has driven unemployment above 27 percent.
"The limiting of places where it is permitted to smoke must be compatible with projects that can generate lots of jobs," said the regional government's spokesman, Salvador Victoria.
On World No Tobacco Day , anti-smoking campaigners hit out at the plan.
"The possible creation of jobs cannot be a basis to justify restricting the health of the population," the leader of the National Commission for the Prevention of Smoking, Francisco Rodriguez, told AFP.
The commission says between 800,000 and 1.2 million Spaniards have stopped smoking since the ban came in.
US firm Las Vegas Sands plans to build four casino complexes with 12 hotels providing 36,000 rooms, nine theatres, three golf courses and convention centres in Alcorcon, a southwestern suburb of Madrid.
The firm says Eurovegas will generate 260,000 jobs and €42 billion ($54 billion) in profits over 10 years.
A spokeswoman for Spain's health ministry told AFP that it was "not working" on the smoking issue at the moment.
Las Vegas Sands operates The Venetian and The Palazzo casinos in Las Vegas and Marina Bay Sands in Singapore, as well as properties in Macau, a former Portuguese colony west of Hong Kong.
The Eurovegas project is backed by Spain's ruling conservative Popular Party but is opposed by left-wing parties, labour groups and top officials of the Roman Catholic Church.
Opponents complain that public money will be used for a private project while Spaniards are suffering from cuts in public services, and warn the casino will draw gangs and prostitution.