Sanchez's eight-month-old administration met its end after failing to get parliament's approval for its 2019 budget proposal earlier this week, adding to the political uncertainty that has dogged Spain in recent years.
"Between doing nothing and continuing without a budget, or giving the chance for Spaniards to speak, Spain should continue looking ahead," Sanchez said in a televised appearance from the Moncloa Palace, the seat of government, after an urgent Cabinet meeting.
The ballot will take place on April 28. It is expected to highlight the increasingly fragmented political landscape that has denied the European Union country a stable government in recent elections.
The 46-year-old prime minister ousted his conservative predecessor Mariano Rajoy last June, when he won a no-confidence vote triggered by a damaging corruption conviction affecting Rajoy's Popular Party.
But the simple majority of Socialists, anti-austerity parties and regional nationalists that united against Rajoy crumbled in the past week after Sanchez broke off talks with the Catalan separatists over their demands for the independence of their prosperous northeastern region.
Sanchez saw the Catalan separatists join opposition lawmakers to vote down his spending plans, including social problems he had hoped would boost his party's popularity.
Sanchez had the shortest term in power for any prime minister since Spain transitioned to democracy four decades ago.
Without mentioning Catalonia directly, Sanchez said he remained committed to dialogue with the country's regions as long as their demands fell "within the constitution and the law," which don't allow a region to secede. He blamed the conservatives for not supporting his Catalan negotiations.
Popular Party leader Pablo Casado celebrated what he called the "defeat" of the Socialists, attacking Sanchez for yielding to some of the Catalan separatists' demands.
"We will be deciding (in this election) if Spain wants to remain as a hostage of the parties that want to destroy it," or welcome the leadership of the conservatives, Casado said.
Catalonia's regional government spokeswoman, Elsa Artadi, retorted that "Spain will be ungovernable as long as it doesn't confront the Catalan problem."
Opinion polls indicate the April vote isn't likely to produce a clear winner, a shift from the traditional bipartisan results that dominated Spanish politics for decades.
Although Sanchez's Socialists appear to be ahead, their two main opponents - the Popular Party and the center-right Ciudadanos (Citizens) - could repeat their recent coalition in the southern Andalusia region, where they unseated the Socialists with the help of the far-right Vox party.
Vox last year scored the far-right's first significant gain in post-dictatorship Spain, and surveys predict it could grab seats in the national parliament for the first time.
Vox's leader, Santiago Abascal, vowed to use the election to "reconquer" the future, a term that refers back to how Spanish Catholic kings defeated Muslim rulers in 15th-century Spain.
Meanwhile, the Socialists are unlikely to be able to form a new government even if they come to a coalition deal with the anti-establishment Podemos (We Can) party, so a third partner will likely be needed.
Sanchez's options are limited. On the right, a deal with the Citizens party seemed off the table, as its leader Albert Rivera has vetoed any possible agreement with a Socialist party led by Sanchez himself.
And the prospect of Catalan nationalists joining any ensuing coalition is remote, both in the light of the recent failed talks and the ongoing trial of a dozen Catalan politicians and activists for their roles in an independence bid two years ago.
"The Socialists don't want an election marked by Catalonia because the issue creates internal division, but right-wing parties will use it as a weapon," said Antonio Barroso of the Teneo consulting firm.
He said polls have erred in recent elections and that clever campaigning could swing the vote significantly.
"The only certainty ... is that fragmentation is Spain's new political reality," he said.
Barry Hatton in Lisbon, Portugal, contributed to this report.
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