Catalonia's regional president has told a meeting of his party he would formally declare independence if Spain starts the process of suspending the region's autonomy tomorrow, a Catalan government source has said.
Madrid has set tomorrow as the deadline for the regional government to back down from a symbolic independence declaration made last week, or face direct rule from the capital.
If Prime Minister Mariano Rajoy moves to apply direct rule, it will take between three and five days for regional autonomy to be effectively suspended.
Earlier Mr Rajoy urged Catalan leader Carles Puigedmont to "act sensibly" and renounce the independence bid.
Mr Rajoy issued his appeal in the national parliament where he sought to win more political support for his threat to take direct control unless the regional government drops its plan to break away.
The move would need only a vote in Spain's upper house, where Mr Rajoy's People's Party holds an absolute majority.
It would be the first time in Spain's four decades of democracy that direct rule has been imposed.
That prospect in the eurozone's fourth-largest economy has prompted hundreds of Catalan firms to move their headquarters, led Madrid to cut economic growth forecasts and rattled the euro.
Mr Puigedmont has already defied Madrid once this week, reiterating on Monday an ambiguous independence declaration he made last week and immediately suspended.
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- Rajoy gives Catalan leader five days to clarify independence stance
- Catalan leader signs suspended 'independence declaration'
"I ask Puigdemont to act sensibly, in a balanced way, to put the interests of all citizens first," Mr Rajoy said, mentioning both residents of the autonomous region, which produces a fifth of Spain's wealth and has its own language and culture, and the rest of the country.
Tomorrow's deadline is Mr Puigdemont's last chance to abandon an independence declaration that Madrid has rejected as illegal.
"It's not that difficult to reply to the question: has Catalonia declared independence? Because if it has, the government is obliged to act in one way, and if it has not we can talk here," Mr Rajoy said in parliament.
The row has rattled financial markets and sent companies scurrying to relocate on safer ground. Banco Sabadell, Spain's fifth-biggest bank, was considering moving its top management to Madrid.
Almost 700 companies pulled out of the northeastern region between 2 October - the day after a referendum on independence which Madrid branded illegal - and 16 October, according to Spain's companies registry.
Tourism, a vital part of the Catalan economy centred on its seaside capital Barcelona, has also taken a hit, with activity falling 15% so far this month, industry association Exceltur said yesterday.
The region's tourism industry could make €1.8bn less than usual in the fourth quarter "if the volatility and confrontation get worse in the coming months", Exceltur said in a statement.
Unless there is a clear renunciation of the independence bid, the prime minister is set to invoke a never-before-used article of the 1978 constitution, which would impose direct central rule.
Catalan newspaper La Vanguardia said yesterday that Mr Puigdemont, a 54-year-old former journalist, was mulling declaring independence and calling so-called constituent elections for the newly-declared republic.
But Catalan foreign affairs chief Raul Romeva told a news conference in Brussels: "Elections are not on the table now."
As the threat of direct rule neared, the Catalan government took a combative tone yesterday.
"Giving in forms no part of this government's scenarios," spokesman Jordi Turull said. "On Thursday, we won't give anything different than what we gave on Monday."
Tempers have flared since Monday after the jailing of two separatist leaders pending an investigation for alleged sedition.
Tens of thousands of protesters gathered along Barcelona's Diagonal Avenue yesterday to call for their release, whistling and shouting "freedom" and "out with the occupying forces".