He has until September 23 to be confirmed as premier — or Spain's deeply-fragmented parliament will be dissolved once again and a new general election held on November 10.
Sanchez's Socialists won the last elections in April but fell far short of a majority, leaving him dependent on the backing of Podemos as well as several smaller regional parties.
Without that, he cannot win the backing of parliament and formally begin a new term at Moncloa, the official residence of Spain's prime minister.
Back in July, Sanchez made two attempts to secure confirmation by the assembly but failed following a dispute with Podemos and its leader Pablo Iglesias that has yet to be resolved.
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The Socialists had initially agreed to form a coalition, albeit reluctantly, with the radical leftwing party, offering it several government portfolios, but Podemos refused, saying the posts did not carry enough political clout.
Now Sanchez has taken the offer of a coalition off the table, offering Iglesias only talks on a joint policy programme in the hope of establishing a minority government with ad hoc parliamentary support from the party. And six weeks on, the situation remains deadlocked.
King hopes to break deadlock
Iglesias has insisted on his party entering government but faced with Sanchez's intransigence, he on Friday suggested forming a “temporary coalition government” that would be able to approve the state budget.
If Sanchez was unhappy with the result, Podemos could then withdraw, while retaining his majority in the chamber, he said.
But government spokeswoman Isabel Celaa dismissed the idea as “absurd” saying the country needs a “solid government” and not one “subject to any test period”.
“It is highly unlikely they will reach an agreement,” said Ernesto Pascual, professor of political science at the Open University of Catalonia.
In a bid to break the deadlock, King Felipe VI will on Monday begin two days of meetings with party leaders, meeting Iglesias on Tuesday afternoon and Sanchez later that evening.
As head of state, only he can give a formal mandate to Sanchez to once again present his candidacy as head of government to parliament, should an agreement be found.
“While there remains ample scope for an agreement, new elections are now likely, given both parties' entrenched positions,” wrote Eurasia Group senior analyst Federico Santi in a note.
“Crucially, the leadership of neither party considers an electoral repetition as particularly risky or costly as of now.”
Should fresh elections be held, surveys suggest the Socialists would win more seats but still fall short of a majority. And Podemos would have less to lose from a new election than opting to back a Socialist government.
Were they to back such a government without taking an active part in it, the leadership fears the party “would be sidelined over time, losing more ground to the Socialists in the long-term struggle between the two parties for
leadership of the Spanish left,” Santi wrote.
And if a new election were held, the outcome would most likely be similar to the current situation, with Sanchez still needing the support of Podemos and smaller regional parties, he added.
Spain has been gripped by political instability since the December 2015 elections ended the traditional two-party system with the emergence of two Podemos and the business-friendly Ciudadanos, leaving the parliament deeply-fragmented.
And the rise of far-right upstart Vox, which entered parliament following April's election, has further complicated the political picture.