The country's nuclear security council on Monday approved a report that gives the green light for the facility to be built near the village of Villar de Cañas in Castilla-La Mancha.
Enresa, the state-owned company responsible for Spain's nuclear facilities, in 2011 chose the site from a list that included eight other communities which bid to house the nuclear dump.
But on Tuesday the new Socialist government of Castilla-La Mancha moved to block the construction of the facility by approving the expansion of a protected area for birds so it includes land earmarked for the radioactive waste site.
"This will protect an area where endangered species live," regional government spokesman Nacho Hernando told a news conference.
The Socialists took power in the region on July 4th following May local elections, ousting the conservative Popular Party which rules at the national level.
Energy Minister Jose Manuel Soria warned on Thursday that Spain would have to abandon nuclear power if the facility is not built.
"It does not seem right to me that a gimmick or political subterfuge is used to stop a facility which if it is not built, we will have to cease generating electricity with nuclear energy in 2018," he told reporters when asked about the regional government's move.
"Given that nuclear energy accounts for about 20 percent of total electricity generation we are talking about a very significant increase in the cost of electricity which we could not allow," he added.
The minister has estimated that if Spain abandoned nuclear power because the facility is not built the cost of electricity in the country would jump by 30 percent.
The site planned for Villar de Cañas would be able to keep nearly 13,000 cubic metres (459,000 cubic feet) of radioactive waste at a single location for up to 60 years, according to Enresa.
The government wants to store all the spent fuel produced at Spain's eight nuclear power stations at the site.
Each power station currently stores the spent fuel which they produce in on site storage pools that are starting to fill up.
Spain has since 2008 stored low to medium-grade nuclear waste at a facility at El Cabril in Cordoba province in the southwest.
Local officials in the village of Villar de Cañas, which has a population of around 500, have welcomed the jobs which the nuclear waste facility would create.
But environmental groups including Greenpeace accuse the dump's supporters of putting money before safety and have lobbied to have the project shelved.