His Socialists won April polls but fell well short of a majority, and Sanchez has until September 23 to be confirmed as premier by a deeply fragmented parliament or else fresh elections will be held in November, the country's fourth in as many years.
Sanchez failed twice in July to be confirmed by the assembly as the Socialists and Podemos were unable to reach an agreement on the formation of a coalition government, which would be Spain's first in the modern era.
This time around Sanchez is no longer seeking to form a coalition with Podemos but instead wants to strike a “pact” with the party in exchange for its support in a parliamentary confidence vote.
A coalition government “was not viable and still is not,” Sanchez said.
“The conditions are not met for us to be allies in the heart of the government. But that should not make us adversaries. We can be loyal allies like we have been in the past,” he added.
To win the support of Podemos, Sanchez proposed appointing members of the far-left party to the head of public institutions, and he unveiled a series of progressive measures such as free daycare and a minimum income to fight child poverty.
Sanchez came to power in June 2018 by winning a surprise no-confidence vote against conservative predecessor Mariano Rajoy with the support of Podemos as well as Catalan separatist parties and Basque nationalists.
But in July Sanchez refused to allow Pablo Iglesias, Podemos's leader, to be part of his government because of major disagreements over policy, including their stance on the Catalan independence question.
Podemos, however, insists on forming part of Sanchez's new government.
“They can't humiliate us further. We have accepted enough humiliations,” Iglesias said during a TV interview earlier Tuesday.
'Everything is possible'
Spain will face fresh elections unless an “intermediate” solution is found between the Socialists' desire to govern alone and Podemos' goal of governing in a coalition, said University of Zaragoza political scientist Cristina Monge.
The Socialists currently have 123 seats in the 350-seat assembly. Polls suggest the Socialists would win more seats in a new election but still fall sort of a majority, and would again need the support of Podemos and several smaller regional parties to be sworn in.
“Everything is possible but in any case, (a solution) will be decided at the last minute,” said Autonomous University of Barcelona political scientist Oriol Bartomeus.
“The question is if the Socialist party is interested in having fresh elections. If that is the case, this is a 'mise-en-scene'. We don't know if what happened today is a step towards a negotiation (with Podemos) or a lie to say 'I tried',” he added.
Spain faces several challenges for which it needs a stable government: an ongoing separatist movement in its northeastern region of Catalonia, high unemployment, low wages and job insecurity.
Since 2015, the country has shifted from a two-party system to a deeply fragmented parliament with the emergence of Podemos, business-friendly party Ciudadanos and more recently far-right Vox.
That has resulted in minority governments which have failed to get any major reforms through, and Sanchez was forced to call early elections in February when his draft budget was rejected.
By AFP's Mathieu Gorse