CATALONIA • Spain will move forward with the process of suspending the powers of the Catalan government after regional president Carles Puigdemont refused to drop his claim to independence.

Spanish stocks and bonds dropped as Prime Minister Mariano Rajoy's government announced its unprecedented decision to directly intervene in Catalonia, a step that will further inflame the conflict over the future of Spain's biggest regional economy. "The government will continue with the procedures set out in Article 155 of the Constitution to restore the legality of self-rule in Catalonia," the government said in a statement yesterday.

Spain used the ultimate constitutional weapon after Mr Puigdemont said the regional Parliament may declare independence unless the government in Madrid agrees to talks.

Mr Puigdemont's response was to an ultimatum from Madrid to renounce his claims to full autonomy by yesterday or face the consequences. "If the central government persists in blocking dialogue and continues its repression, the Catalan Parliament may proceed, if it considers it appropriate, to approve a formal declaration of independence," he said in a letter to Mr Rajoy.

Under its Constitution adopted in 1978, Spain is one of the Western world's most decentralised nations. Its 17 regions have varying degrees of control over issues such as education and healthcare.

Catalonia is among those with the most autonomy. Article 155 says if a region's government breaches its constitutional obligations or "acts in a way that seriously threatens the general interest of Spain", Madrid can "take necessary measures to oblige it forcibly to comply or to protect said general interest".

Professor Javier Perez Royo of the University of Seville said measures could include "suspending the regional government, placing the (Catalan police force) Mossos d'Esquadra under the orders of the Interior Ministry" and even "closing the regional Parliament".

Madrid has also proposed regional elections in Catalonia to overcome the political impasse. Mr Puigdemont did not respond to that suggestion yesterday.

Mr Rajoy has called for a special session of his Cabinet tomorrow. His advisers met the opposition Socialists yesterday to finalise the measures they plan to take.

"It looks like both parties are sticking to the script, which is trying to blame each other for what happens next," said Mr Antonio Barroso, a political risk analyst at Teneo Intelligence in London. "The next step is that Rajoy will go to the Senate to seek authorisation to restore the rule of law in Catalonia."

The outcome is that "all roads lead to new elections in Catalonia", said Mr Barroso. "The question is how we get there. Puigdemont may try to beat Rajoy to it. It is a way to keep up momentum for the independence movement."

Spain's benchmark stock index was down 0.9 per cent as of 10.42am in Madrid. Ten-year government bond yields rose three basis points to 1.64 per cent.

In an address to the regional Parliament in Barcelona last week, the Catalan President said that an Oct 1 referendum held in breach of Spanish law gave him the right to declare independence, but that he was suspending the drive for full autonomy in favour of dialogue.

In his letter to Mr Rajoy, Mr Puigdemont said his request for a face-to-face meeting had been ignored, and that Spanish "repression" of Catalonia was being stepped up with the jailing of two separatist activists on Monday.

BLOOMBERG, AGENCE FRANCE-PRESSE