Spain's acting premier Mariano Rajoy on Wednesday lost a parliamentary confidence vote for a second term after he failed to win enough support from the opposition.
Rajoy, of the centre-right People's Party (PP), received 170 votes of support, falling short – as expected – of the minimum 176 needed to form a government.
The result might take the country closer to a potential third election in a year.
He needed the support of the Socialists, who voted unanimously against him, to win the required absolute majority.
Spain's lack of a functioning government since inconclusive elections in June and December, and the resulting political deadlock, have stalled investment and there are signs it could be starting to limit a strong economic recovery.
Government bond yields rose sharply ahead of the vote, underperforming eurozone peers, as the possibility of more months of political impasse spooked investors.
Liberal newcomer Ciudadanos voted in favour of Rajoy, as did a small party from the Canary Islands region. The Socialists, anti-austerity alliance Unidos Podemos, and regional parties from the Basque Country and Catalonia voted against him.
Rajoy now faces a second vote on Friday in which delegates can abstain and a simple majority would suffice to allow him to form a PP-led minority government. He would need just 11 abstentions to win this second vote, but a loss is also likely if the Socialists do not cede.
If he loses Friday's vote, Rajoy has two months to try to form a government before triggering another election, which could then fall on Christmas Day.
Spain politics: now what? Will 2nd parliamentary vote tomorrow change anything? No. Will 3rd elections? V unlikely. https://t.co/35huVICHgi
— Dhruv Kumar (@DhruvJayKumar) September 1, 2016
Socialist Party leader Pedro Sanchez says Rajoy is too tarnished by a long series of corruption scandals involving the PP and the austerity policies his PP government enacted during a deep recession.
Sqeeze On Economic Recovery
"The problem is that you are not a trustworthy person," Sanchez said during a marathon series of speeches over two days by party leaders ahead of the vote.
In the preliminary speeches, Rajoy called on the Socialists to at least abstain in the vote in order for Spain to be able to form a government and to prevent a third election.
"Given the situation we are in, after two elections and the threat of a third election which you seem to want, I ask you to abstain," Rajoy told parliament on Wednesday.
"We can't keep on having election after election until there is an outcome for a government that Mr Sanchez likes."
Rajoy told parliament he wanted to form a government with broad support that would be able to safeguard Spain's economic recovery and play a leading role in the European Union.