Prime Minister Mariano Rajoy vowed on Wednesday to do everything in his power to prevent the region's independence in a dispute that has hurled Spain into its deepest political crisis in decades.
He has refused to rule out imposing direct rule over the semi-autonomous region - a move many fear could lead to unrest.
Mr Rajoy called an emergency meeting after Catalonia's president Carles Puigdemont announced on Tuesday he had accepted the mandate for "Catalonia to become an independent state" following a banned referendum earlier this month.
Catalonian President Carles Puigdemont signs a symbolic declaration of ndependence, but urges the Catalan parliament to suspend secession in hopes of holding tension-easing talks with the Spanish government.
But in a parliamentary speech that left many confused, Mr Puigdemont immediately called for Catalonia's independence to be suspended to allow for negotiations with the central government.
On Wednesday, a government source who refused to be named said "all options" were on the table as the crisis talks were under way.
At stake is the future of a region of 7.5 million people deeply divided over independence, one of Spain's economic powerhouses whose drive to break away has raised concern for stability in the European Union.
Crowds of thousands gathered outside the parliament building in Barcelona on Tuesday evening, waving Catalan flags and banners screaming "democracy" in the hope of witnessing a historic night in a region that remains deeply divided over independence.
But Spain's political establishment rounded on Mr Puigdemont following his declaration and support among separatists in Catalonia was mixed.
The government stuck to its stance that it would not accept mediation or any talks until Catalan leaders drop their independence bid.
"Mr Puigdemont - no one - can expect to impose mediation without returning to legality or democracy," Deputy Prime Minister Soraya Saenz de Santamaria told reporters.
She said Puigdemont was "a person who doesn't know where he is, where he's going or with whom he wants to go".
Barcelona resident Maria Rosa Bertran said she was against a delayed secession.
"I find it even worse because it is suffering a longer agony. Indecision and uncertainty is the worst thing that can happen to us," she told AFP.
Following his declaration to parliament, Mr Puigdemont and his allies signed an independence declaration outside the chamber, but its legal validity was unclear.
Spain and Catalonia now enter into the unknown as Madrid has repeatedly said independence is not up for discussion.
Catalonia pressed ahead with an independence referendum on October 1 that the central government said breached Spain's constitution.
Spanish police cracked down on the polls, beating some voters as they closed down polling stations.
"I did not expect independence to be declared today because of all the processes that the government of Spain has begun, both with police actions and with threats," Marc Cazes, a student in Barcelona, said on Tuesday.
About 90 per cent of those who cast ballots voted for independence but the poll was poorly monitored and many Catalans opposed to secession boycotted it.
The crisis has caused deep uncertainty for businesses in one of the wealthiest regions in the eurozone's fourth-largest economy.
A string of companies have already moved their legal headquarters - but not their employees - from Catalonia to other parts of the country.
But on Wednesday morning, the Spanish stockmarket was up 1.16 percent on hopes for a breakthrough in the crisis.
The single currency was up after Mr Puigdemont's announcement and held onto gains in Asian trade on Wednesday, buying $1.1815.
But it was still down two cents from its recent highs seen last month due to the political uncertainty.
Stephen Innes, head of Asia-Pacific trading at OANDA, said while the euro rose it "gained little traction as this is little more than kicking the can down the road. It's unlikely we've heard the last of this debate despite cooler heads prevailing".
Demands for independence in Catalonia, which has its own language and cultural traditions, date back centuries.
But a 2010 move by Spain's Constitutional Court to water down a statute that gave Catalonia additional powers, combined with a deep economic meltdown in Spain, sparked a surge in support for independence.