"Between doing nothing and continuing without a budget, or giving the chance for Spaniards to speak, Spain should continue looking ahead," said Sanchez in a televised appearance on Friday, after parliament voted down his government’s budget bill.
Sanchez has been in office for eight months, leading a coalition that included the far-left Podemos party, Basque nationalist lawmakers and 17 Catalan separatist MPs.
The coalition crumbled after Catalan MPs joined right-wing lawmakers to reject the budget, to protest against separatist leaders being put on trial for their role in attempting to break Catalonia away from Spain in 2017.
On Friday Sanchez said he remained committed to dialogue with the country's regions as long as their demands fell "within the constitution and the law". He made no specific mention of Catalonia, and blamed the conservatives for not supporting his negotiations.
The Popular Party said Sanchez yielded too much to the separatists’ demands.
Opinion polls show that no single party would win enough votes to govern on its own. The Socialists appear to be ahead, but they would unlikely get enough votes for a majority, even with the anti-establishment Podemos party.
The two main opponents, the Popular Party and the centre-right Ciudadanos could repeat a recent coalition in the southern Andalusia region, where they unseated the socialists with the help of the far-right Vox party.