Spain's government announced Friday it will reform how the debt-struck regions are financed, a day after flatly rejecting Catalonia's bid for fiscal independence.
Prime Minister Mariano Rajoy's government revealed the decision as an economic row with Catalonia escalated and speculation mounted that the northeastern region will call snap elections.
Rajoy's deputy, Soraya Saenz de Santamaria, said many of Spain's 17 powerful regions found fault with the existing model under which they are financed by the Madrid.
"But this government is ready to evaluate it. It will evaluate it and reform it in this legislature," she told a news conference following a weekly cabinet meeting.
Rajoy held talks with Catalan president Artur Mas in Madrid on Thursday and said there was "no margin" for negotiations on letting the region raise and spend its own taxes.
Catalonia feels it gets a raw deal from Madrid, providing much more to the central government than it receives at a time when it is making painful austerity cuts to health and education spending.
Hundreds of thousands of Catalans flooded the regional capital Barcelona last week, many calling for a split from the rest of Spain and economic independence.
Last month, Catalonia reached out for a 5.0-billion-euro ($6.3-billion) central government rescue so as to make repayments on its 40-billion-euro debt, equal to a fifth of its total output.
Madrid says the Catalan campaign for fiscal autonomy comes at the worst moment for a country making deep austerity cuts to slash the public deficit even as it fights recession and struggles with a jobless rate of nearly 25 percent.
Catalonia had been invited to cooperate in a reform of the regional financing system, Saenz de Santamaria said.
Rajoy had informed Mas, she added, that "these are difficult times for many Catalans and for very many Spaniards and political instability adds a crisis to the crisis."
Spanish newspapers said Mas could respond to Rajoy's rejection by calling snap regional elections, perhaps on November 25. A referendum on Catalan independence is barred by the Spanish constitution, however.
"I think this is a time to work for stability," Saenz de Santamaria said when asked about the possibility of elections in Catalonia.
The deputy premier said she knew nothing of the elections, which could only be in the mind of Mas.
"What I ask is that he analyze it from the point of view of the political stability that Spain needs at a time when all Spaniards are united in a common, shared goal of getting out of the crisis," she said.
"I think they want to see from their politicians the same shared spirit and the same essential priority of getting out of the crisis and helping to generate confidence. Political instability is the the worst factor for rebuilding confidence."
Two Spanish regions, Galicia and the Basque Country, are holding general elections on October 21.
Spain's provinces gained a large degree of autonomy, including responsibility for health and education, after the 1975 death of General Francisco Franco who had centralised power in Madrid.
Some regions fear Rajoy's conservative Popular Party may erode those powers during the economic crisis, for example by overseeing the finances of those that fail to meet deficit-cutting targets.