Spain will enact Article 155 of the Constitution which allows Madrid to suspend Catalonia's autonomy, the prime minister's office said in a statement.
The measure will be sent to the Senate for approval on Saturday, the statement on Thursday said.
Prime Minister Mariano Rajoy was responding to a letter by Catalan leader Carles Puigdemont, which said Catalonia will declare independence should Spain continue to block talks and enact Article 155.
Spain denounced the attitude maintained by those responsible for harming "the coexistence and economic structure of Catalonia", the prime minister's statement said, promising that Madrid would do everything in its power to restore "legality and constitutional order".
Spanish government spokesperson Inigo Mendez de Vigo told reporters in Madrid: "Cabinet ministers will approve the [Article 155] measures on Saturday, which will be submitted to the Senate to protect the interests of the Spanish people - including the Catalans in Catalonia.
"The government will do everything in its power to put a brake on the economic deterioration in Catalonia caused by the actions of the present Catalonia president."
Puigdemont is yet to respond to Madrid's latest move.
Article 155, which is described as the "nuclear option", has never been used since the Constitution was ratified in 1978.
Thursday's developments extend a struggle between Madrid and Barcelona over the status of Catalonia since the disputed October 1 referendum on secession from Spain, which was halted by "excessive force" from Spanish national police.
Earlier in the day, Puigdemont's second letter in a week called for talks and threatened to declare Catalan independence if Article 155 was enacted.
"If the central government persists in impeding dialogue and continuing its repression, Catalonia's parliament will proceed ... with a vote to formally declare independence," Puigdemont's letter said.
The stripping of Catalonia's autonomy is sure to increase tensions between Madrid and Barcelona, which are already high. Two pro-independence organisers, Jordi Cuixart and Jordi Sanchez, were imprisoned Monday without bail pending charges of sedition.
An estimated 200,000 people took to the streets to demand their release in Barcelona on Tuesday, calling them "political prisoners".
The Catalan government says voters overwhelmingly supported independence with 90 percent of votes for secession, but turnout was less than 50 percent.