Opinion polls have suggested it will be harder for a right-wing split between three parties - the centre-right Ciudadanos, conservative People's Party and Vox - to clinch a majority, but this scenario is within polls' margin of error and can not be ruled out.
Yet even if got them all on board he would still end up one seat short of an absolute majority of 176.
He would likely turn to United We Can, putting them still short of a majority government, but will have to decide whether he wants to make pacts with Catalan and other separatist parties - a move that would anger many Spaniards.
Although the far-right party VOX leapt from 0.2 % of the votes in 2016 to 10.3 % on Sunday, it is nowhere near to what far-right parties gained in other countries, such Austria, Finland, France, Italy and Sweden, says Torreblanca. Together, these three parties would only control 149 seats. Unless Mr Sánchez can find a way to defuse the Catalan separatist movement, Spain will remain politically volatile for years to come.
The center-left Socialist party won re-election in Sunday's ballot, collecting almost 29% of votes, and will try to form a government. But it will be much more tricky when it comes to the ERC (Republican Left of Catalonia), who won the most seats in Catalonia (15).
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Their nearest rivals, the main opposition conservative Popular Party (PP), bagged just 66 seats compared to 137 in 2016, its worst showing in over two decades. There is a risk of a renewed escalation of tensions in coming months, as the Supreme Court may reach a verdict around the summer time, although the risk of a stand-off between the central and regional government has declined with the poor electoral result of PP-Cs-Vox combined in this election.
Mr Sanchez's PSOE, after barely nine months of a hard interim term, now stands among Portugal's Socialist Party and Britain's Labour Party as anomalies to the trend of post-2008 decline devouring social-democratic formations across the continent.
Retired construction worker Carlos Gonzalez said he had cast his ballot for the Socialists because they were a "moderate option".
The surge in turnout included a huge boost in the northeastern Catalonia region, which has been embroiled in a political quagmire since its failed secession bid in 2017 put several separatist leaders in jail while they undergo trial.
That could mean Sanchez having to rely on pro-independence Catalan parties or Basque nationalists to govern.
Though he and Ciudadanos leader Albert Rivera have sharply different views on Catalonia and both ruled out forming an alliance during the campaign, speculation persists that the pair could yet strike a coalition deal.