Spain's political showdown with Catalonia is set to reach a new level on Thursday when political leaders in Madrid and Barcelona are expected to make good on pledges made to their supporters to stick to their tough positions over the region's future.

In an unprecedented move since Spain returned to democracy in the late 1970s, Prime Minister Mariano Rajoy will impose direct rule in Catalonia unless the region's leader, Carles Puigdemont, retracts by 4 a.m. ET an ambiguous declaration of independence he made last week.

Puigdemont told members of his Catalan Democratic Party on Wednesday night that he would not back down and would press ahead with a more formal declaration of independence if Rajoy suspends Catalonia's political autonomy.

It is not yet clear how and when this declaration would take place and whether it would be endorsed by the regional assembly, though many pro-independence lawmakers have openly said they wanted to hold a vote in the Catalan parliament to make it more solemn.

If Rajoy invokes Article 155 of the 1978 constitution, which allows him to take control of a region if it breaks the law, it would not be fully effective until at least early next week as it needs upper house approval, offering some last-minute leeway for secessionists to split unilaterally.

Article 155 has never been used during Spain's four decades of democracy.

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A man lies down with a Catalan separatist flag next to candles during a protest in Barcelona on Tuesday against the imprisonment of leaders of two of the largest Catalan separatist organizations. (Gonzalo Fuentes/Reuters)

Rajoy's People's Party holds an absolute majority in the upper house, the Senate.

Authoritative Catalan newspaper La Vanguardia reported that Madrid plans to appoint its own delegates to run regional government departments. Puigdemont would remain nominally in his role but stripped of all powers.

Even though it is not clear what direct rule will look like, the prospect has raised fears that social unrest could add to the turbulence, on the heels of an exodus of hundreds of Catalan firms and cuts to economic growth forecasts.

In the latest grim prediction, Spain's independent budget watchdog warned this week that continued uncertainty could wipe as much as €12 billion ($17.6 billion Cdn) off potential economic growth next year, cutting forecasts by between 0.4 and 1.2 percentage points.

Catalonia accounts for 20 per cent of Spain's GDP.

'Volatility and confrontation'

Since an Oct. 1 independence referendum that Madrid branded illegal, some 700 companies have moved their head offices from Catalonia, according to Spain's companies' registry.

Banco Sabadell, Spain's fifth-biggest bank, is considering moving its top management to Madrid.

Tourism, a vital part of the Catalan economy centred on its seaside capital Barcelona, has also taken a hit, with activity falling 15 per cent so far this month, industry association Exceltur said on Tuesday.

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People sunbathe on a Barcelona beach on Oct. 13. (Gonzalo Fuentes/Reuters)

The region's tourism industry could make €1.8 billion ($2.65 billion) less than usual in the fourth quarter "if the volatility and confrontation get worse in the coming months," Exceltur said in a statement.

Earlier on Wednesday, Rajoy urged Puigdemont to "act sensibly" and scrap the bid or risk direct rule.

The prime minister repeated a call for clarity on the matter.

"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," Rajoy said in parliament.

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Spanish Prime Minister Mariano Rajoy answers a question at the parliament in Madrid on Wednesday. Rajoy urged Puigdemont to 'act sensibly' and scrap the independence bid or risk direct rule. (Juan Medina/Reuters)

A central government source later said Madrid viewed a formal independence declaration as "unacceptable blackmail".  

Puigdemont has already defied Rajoy once this week, when he ignored a first deadline to drop the independence campaign and instead called for talks.

Both sides have traded blame for the standoff for more than a month.

Rajoy said the Catalan government has repeatedly broken the law, including when it held a banned vote on independence on Oct. 1 and made a symbolic declaration of independence on Oct. 10, only to suspend it seconds later.

Puigdemont said a violent police crackdown on the referendum and arrests of pro-independence leaders on charges of sedition show the Spanish state has become authoritarian.

Tempers have flared since the jailing on Monday of two separatist leaders, pending an investigation for alleged sedition.

Tens of thousands of protesters gathered along Barcelona's Diagonal Avenue on Tuesday to call for their release, whistling and shouting "freedom" and "out with the occupying forces."

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People gather to protest in Barcelona on Tuesday night against Spain's high court decision to imprison two Catalan independence leaders without bail. (Emilio Morenatti/Associated Press)