The Socialists, who lead the minority national coalition, have been rocked by corruption and sexual misconduct allegations and the vote in the rural southwestern region was seen as an indicator of the party's wider prospects.
They won just 18 seats in the 65-seat assembly down from 28, their worst-ever regional result in Extremadura.
The Socialists had governed the region for decades but the conservative Popular Party (PP) took control with Vox's support in 2023.
The PP called the vote hoping to get a majority and although they came out on top again on Sunday with 29 seats, they fell short.
The result means the PP will once again rely on Vox, which went from five to 11 seats, to pass legislation.
Regional governments in Spain control key policy areas such as education, healthcare, infrastructure, and culture.
It was the first regional election since a court ordered José Luis Ábalos, a former top aide to Sánchez, to stand trial over claims he took kickbacks related to the awarding of public contracts.
The prime minister's wife, Begoña Gómez, and younger brother, David are also facing graft allegations.
David Sánchez is set to go on trial for influence peddling in May along with 10 other defendants including the Socialist candidate to head Extremadura's government, Miguel Angel Gallardo -- who called Sunday's election results "really bad".
The Socialists have also come under fire in recent weeks for allegedly failing to address sexual harassment by senior male officials.
Sunday's vote will be followed by regional elections in Andalusia, Aragón, and Castilla y León during the first half of 2026.
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