His Socialist party won 123 seats in early polls in April, the most of any party, but still fell far short of an absolute majority in the 350-seat assembly.
After weeks of stalled talks with different parties to get backing to be sworn in for another term, last week Sanchez upped the pressure by setting July 23 as the date for a first confidence vote in parliament on his candidacy.
But this pressure has not had led the Socialists' desired allies, far-left party Podemos, to back down from a demand to be part of a ruling coalition, a condition Sanchez has refused.
He has instead proposed that Podemos pick some independents to be part of his government.
"We have serious differences with Podemos" which could "paralyse" a possible coalition government, Sanchez said Thursday during an interview with spanish public television.
Sanchez highlighted as an example the issue of Catalonia, recalling that Podemos -- unlike the Socialists -- is in favour of allowing the wealthy northeastern region to hold referendum on self-determination.
Catalonia pushed ahead with a banned independence referendum in July 2017, which was followed by a failed independence declaration that triggered Spain's worst political crisis in decades.
Sanchez said later on Thursday that he had called Podemos leader Pablo Iglesias to propose that they first try to reach agreement on policies and then discuss the composition of the new government.
"Unfortunately he rejected the proposal. We will keep trying," Sanchez added in a tweet.
For his part Iglesias on Thursday demanded the Socialists "abandon their red line of having a government of just one colour."
Even if Sanchez gets the support of Podemos and all the small, regional, non-separatist parties which won representation the election, he will still fall short of an absolute majority.
That means he would lose the first investiture vote on July 23 when an absolute majority of votes in favour is needed.
But during a second vote scheduled for just two days later, he will only require a simple majority -- more "yes" than "no" votes.
However in order for this to happen Sanchez would need Catalan separatist parties to abstain, a scenario which he wants to avoid at all costs.
Conservative parties routinely accuse him of being held "hostage" by the separatists.
Sanchez came to power in June 2018 with the help of the separatists by ousting conservative Popular Party (PP) prime minister Mariano Rajoy in a no-confidence vote.
In a further complication, the main opposition PP and centre-right Ciudadanos have both so far refused to abstain from voting to allow Sanchez to come to power.
In 2016 many Socialist lawmakers abstained from voting to allow Rajoy to be sworn in after ten months of stalled talks on forming a new government. But Sanchez was not one of them.
If Sanchez loses the second investiture vote on July 25, a two-month period opens during which parties would have to solve the stalemate before new elections are automatically triggered.
They would be Spain's fourth general election in four years.
Teneo Intelligence analyst Antonio Barroso said that while the fear of new elections mighly ultimately lead Podemos, which has slumped in the polls, to back Sanchez, "the possibility of a repeat poll taking place in November cannot be discarded."
Sanchez said Thursday he was not "contemplating" another election.
But he said since it is now difficult for one party to obtain a majority in Spain's increasingly fragmented parliament, the constituion should be reformed to make it easier for a party with minority support to form a government.