​Spanish Prime Minister Mariano Rajoy on Wednesday gave the Catalan government eight days to drop an independence bid, failing which he would suspend Catalonia's political autonomy and rule the region directly.

Rajoy would probably call a snap regional election after activating Article 155 of the constitution that would allow him to sack the Catalan regional government.

Catalan regional President Carles Puigdemont declared independence from Spain on Tuesday night but then immediately suspended it and called for negotiations with the Madrid government.

He said the suspension was a response to international requests for dialogue between the two governments.

'Independence fairytale'

Rajoy said in a televised address after a cabinet meeting  on Wednesday called to consider the government's response  that,"The cabinet has agreed this morning to formally request the Catalan government to confirm whether it has declared the independence of Catalonia, regardless of the deliberate confusion created over its implementation."

He later told Spain's parliament the Catalan government had until Monday afternoon to answer. If Puigdemont was to confirm he did declare independence, he would be given an additional three days to rectify it, until Thursday. Failing this, Article 155 would be triggered.

Catalonia's independence declaration put on hold2:18

Rajoy rejected dialogue or negotiation about what he called "the independence fairytale."

He said his government received numerous offers of mediation but he also told parliament" "There is no possible mediation between the democratic law and disobedience and unlawfulness."

Catalan conundrum

It is not yet clear if the Catalan government will answer Rajoy's requirement but it now faces a conundrum, analysts say.

If Puigdemont says he did proclaim independence, the central government will step in. If he says he did not declare it, then far-left party CUP would probably withdraw its support for his minority government.

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A couple with a Catalan flag at a rally in Barcelona await a Tuesday evening appearance by their regional leader in parliament with expectations of a declaration of independence for Catalonia. (Francisco Seco/Associated Press)

"Rajoy has two objectives: if Puigdemont remains ambiguous, the pro-independence movement will get more fragmented; if Puigdemont insists on defending independence then Rajoy will be able to apply Article 155," said Antonio Barroso, deputy director of the London-based research firm Teneo Intelligence.

"Either way, Rajoy's aim would be to first restore the rule of law in Catalonia and this could at some point lead to early elections in the region."

The stakes are high — losing Catalonia, which has its own language and culture, would deprive Spain of a fifth of its economic output and more than a quarter of exports.

Call for dialogue dismissed

Madrid responded angrily to Puigdemont's speech to Catalonia's parliament, saying his government could not act on the results of the referendum.

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"Neither Mr. Puigdemont nor anyone else can claim, without returning to legality and democracy, to impose mediation... Dialogue between democrats takes place within the law," Deputy Prime Minister Soraya Saenz de Santamaria said.

A spokesman for the Catalan government in Barcelona said earlier on Wednesday that if invokes Article 155, it would press ahead with steps towards statehood.

"We have given up absolutely nothing ... we have taken a time out ... which doesn't mean a step backwards, or a renunciation or anything like that," Catalan government spokesman Jordi Turull told Catalunya Radio.

Spanish Socialist opposition leader Pedro Sanchez said he would back Rajoy if he had to activate Article 155 and that he agreed with the prime minister to launch constitutional reform within six months to address how Catalonia could fit better in Spain.

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People hold up signs as they attend a pro-union demonstration in Barcelona on Sunday. (Albert Gea/Reuters)

It wasn't clear how the Catalan government would respond to that offer.

Market relief

Puigdemont's speech also disappointed supporters of independence, thousands of whom watched proceedings on giant screens outside parliament before sadly leaving for home.

Financial markets, however, were encouraged that an immediate declaration of independence had been avoided. Spain's benchmark IBEX share index rose 1.3 per cent on Wednesday.

At European Union headquarters in Brussels, there was relief that Spain, the euro zone's fourth-largest economy, now had at least bought some time to deal with a crisis that was still far from over.

One EU official said Puigdemont "seems to have listened to advice not to do something irreversible." The EU has been cool to Puigdemont's calls for European mediation.

The politics of independence movements | Turning Point8:09

With files from Associated Press and CBC News