Waving red and yellow Spanish flags, protesters massed in the Plaza de Castilla, a large square in the heart of Madrid's financial district and called on Sánchez to resign, shouting "traitor".
More than 100 little-known, small groups linked to the right and far-right called the rally under the slogan "For unity, dignity, the law and freedom. General elections now!".
The demonstration was supported by the main opposition conservative Popular Party (PP) and the extreme-right Vox.
Speakers attacked the government for a string of policies and decisions, ranging from an amnesty for Catalan independence campaigners to its pacts with regional separatist parties, as well as for corruption probes affecting Socialist party figures and Sánchez's wife Begona Gomez.
Around 25,000 people took part, according to the central government's office in the region. Organisers put the turnout at roughly 400,000.
Protesters held up placards reading "Get lost Sánchez" and "Sánchez is destroying Spain" as well as slogans opposing immigration.
Vox leader Santiago Abascal, the only party leader to attend, told reporters: "This government is ruining Spaniards, has betrayed them, has lied to them."
"Today Spaniards, whatever the government says, are poorer than when Pedro Sánchez came to power. It is harder for them to make ends meet," he added.
More Spaniards are in work and incomes have risen, but so have inflation and rents.
Sánchez, in office since 2018, heads a fragile minority government which relies on the votes of Catalan and Basque separatist parties in parliament to pass legislation.
His concessions to these parties have infuriated some on the right.
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