Spain appears to have offered Catalonia's separatists a way out of their dispute with the central government, suggesting fresh elections in the region could resolve the crisis.

The reported offer is the latest development in a political back-and-forth between Madrid and Barcelona since the disputed October 1 referendum on secession from Spain.

Hours before Catalan regional President Carles Puigdemont faced a 10am local time (08:00 GMT) Thursday deadline to say whether or not he is declaring independence, a government source told AFP news agency that elections "could be considered a return to legality".

The government had earlier warned Puigdemont that unless he backed down, Spain's government would start proceedings to take direct control over the semi-autonomous region.

"All I ask of Mr Puigdemont is that he acts with good sense," Mariano Rajoy, Spain's prime minister, told parliament on Wednesday as the government threatened to trigger Article 155 of Spain's constitution, a never-before-used provision that would allow it to suspend Catalan autonomy.

But there were increasing indications later on Wednesday that elections are being considered as a way to steer clear of these uncharted waters.

Incidentally, Article 155 has never been used in since the Constitution was ratified in 1978, and Spanish authorities are not quite sure how it would unfold.

Spain has been in limbo since Catalonia held the banned referendum, which prompted a police crackdown that shocked the world.

'Only possible path'

On October 10, Puigdemont declared independence for eight seconds in Barcelona before suspending the declaration to encourage talks Madrid.

Rajoy responded with an ultimatum, giving Puigdemont until Monday, October 16, to clarify his stance.

That day, Puigdemont instead offered two months of dialogue with Madrid to foster independence.

Madrid then extended the deadline to October 18, but threatened to invoke Article 155.

Elections sanctioned by Madrid - unlike the referendum, which the Constitutional Court ruled illegal - would allow Catalan voters to have a say on how to move forward.

"The only possible path for Mr Puigdemont is to restore legality and, from a political point of view, move the elections forward," Spain's opposition Socialist leader Pedro Sanchez, who is working with the government on the Catalan issue, said in Brussels.

With Puigdemont due to meet the leadership of his PDeCat party on Wednesday night, a Catalan government source said elections were "not one of our priorities" but did not rule them out.

Tensions have also risen over the detention of two influential Catalan separatist activists, Jordi Cuixart and Jordi Sanchez, who were set to spend a third night in jail on Wednesday pending an investigation into sedition charges.

Amnesty International, the global rights group, joined calls for them to be freed, branding the charges against them "excessive", after tens of thousands of people held a candle-lit rally in Barcelona on Tuesday urging their release.

Referendum fallout

The Catalan government said 90 percent of the October 1 referendum votes were in favour of independence, but turnout was less than 50 percent.

With its own language and culture, Catalonia is proud of its autonomy but its 7.5 million people are deeply divided over independence.

There are fears that moving to impose direct rule could inflame tensions in a crisis that has already led to huge street rallies and unnerved EU neighbours.

The dispute has prompted a business exodus, with more than 800 companies moving their legal headquarters out of Catalonia in a bid to minimise the instability.

Separatists argue that wealthy Catalonia, which represents about a fifth of Spain's economic output, does too much to prop up the rest of the country and would be better off going it alone.

But opponents say the region has more clout as part of a bigger Spain and that the instability could be disastrous for its economy.

- With additional reporting by Al Jazeera's Creede Newton in the Catalan region