The leader of Spain's biggest opposition party has snubbed an approach from acting Prime Minister Mariano Rajoy to create a "grand coalition" that would govern the country and end seven months of political deadlock.

Rajoy's conservative Popular Party collected most votes in an unprecedented repeat election last month but fell short of a majority in Parliament and needs other parties' support to take power.

Pedro Sanchez, leader of the center-left Socialist Party which came second in the ballot, said after meeting with Rajoy on Tuesday he can't endorse Popular Party policies that cut public services and reduce welfare payments.

Sanchez told reporters: "We're an alternative to the Popular Party. We can't support what we want to change."

Spain faces a possible third election this fall if cross-party negotiations fail.