The maker of everything from small appliances to washing machines, fridges and kitchen furniture said it had started negotiations to restructure its debt, estimated by the Spanish media at €800 million ($1.1 billion).
"The company has up to four months to negotiate an agreement with its creditors," said a statement issued by Fagor, part of sprawling Mondragon group created six decades ago in the northern Basque Country region.
Fagor said it had informed the commercial court in San Sebastian of the negotiations.
Initial talks began weeks earlier between the Mondragon group, the Basque government, creditor banks and other lenders with the aim of enabling Fagor to deal with immediate payments due and to normalise its business activity, it said.
The pre-bankruptcy procedure was recently introduced into Spanish law to give businesses extra time to avoid filing for bankruptcy.
Basque regional government spokesman Josu Erkokera said rumours of a Fagor bankruptcy amounted to the "worst financial news" of the year for the region, where 2,000 of Fagor's 5,700 workers are based.
The Mondragon group was founded in the 1950s by local priest Jose Maria Arizmendiarrieta as a small workers' cooperative and is now an international conglomerate with a mission of maintaining jobs.
Its various branches, present in 20 countries, include industry, distribution and finance.
Foreign sales reached nearly €4 billion ($5.2 billion) in 2011, accounting for two thirds of the corporation's industrial division, which produces consumer electronics, car parts, machinery, sports gear and more.
Despite its international presence, Mondragon's cooperative structure has kept most of its jobs and production in Spain, with 35,000 employees in the Spanish Basque Country, 35,000 elsewhere in Spain and about 13,500 abroad.
Most of its workers are partners in the firm, voting to elect the bosses and make sensitive decisions.