Spain's political crisis has taken a dangerous turn with the country bracing for the fallout from Catalonia's declaration of independence and Madrid's decision to impose direct rule, sack the president and call elections for Dec. 21.

Concern is growing that the escalating conflict could spark clashes and widespread civil disobedience as Catalan officials refuse to submit to Madrid's authority and resist any attempt to arrest regional leaders. The Spanish economy is also feeling the impact of the turmoil as economic growth slows and more than 1,300 businesses move their corporate offices out of Catalonia because of the instability.

"The clash is here, and it won't be pretty," said Antonio Barroso who specializes in Spain at Teneo Intelligence, a London-based consulting firm. "This will lead to increased tensions on the ground, and potentially new episodes of clashes between demonstrators and the police."

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Spain has been gripped by the standoff between Madrid and Catalonia since Oct. 1 when 90 per cent of voters backed independence in a chaotic referendum that was marred by several clashes between national police and people heading to the polls. The Spanish government declared the vote illegal and only 43 per cent of eligible voters participated.

Catalonia's President, Carles Puigdemont, pressed ahead with sovereignty and on Friday the Catalan parliament adopted a motion to "constitute the Catalan republic as an independent and sovereign country, under the rule of law." An hour later, Spain's Senate approved a series of extraordinary measures that gave the central government the power to impose a form of direct rule over Catalonia.

Spanish Prime Minister Mariano Rajoy quickly used those powers and by Friday evening he had fired Mr. Puigdemont, suspended the Catalan parliament and called for elections on Dec. 21. He also dismissed the head of the regional police force and prosecutors indicated they could order the arrest of Mr. Puigdemont and others on charges of sedition.

"Democracy has been destroyed in Catalonia," Mr. Rajoy said after announcing the actions. He added that the declaration of independence was based on lies and the measures he was taking were necessary to restore the rule of law in the region. "We want to stop the steps they are taking that are against our constitution," he said. "The Spanish people are living through a sad day in which foolishness has prevailed over the law."

Mr. Puigdemont remained defiant. After the vote, he addressed hundreds of cheering supporters outside parliament telling them: "In the days ahead, we must keep to our values of pacifism and dignity. It's in our, in your hands to build the republic."

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On Saturday Mr. Puigdemont called on Catalans to peacefully oppose Spain's imposition of direct rule in the region, in a veiled refusal to accept his Cabinet's dismissal.

But the political machinations also revealed deep divisions on both sides. The three main opposition parties in Catalonia's parliament boycotted the vote on independence arguing Mr. Puigdemont's push to declare sovereignty had divided the region and hurt the economy. In Madrid, some parliamentarians expressed concern about the sweeping powers granted to Mr. Rajoy and urged him to be cautious.

It's not clear how far Mr. Rajoy will go in taking control of Catalonia, which is one of the Spain's wealthiest regions and accounts for nearly 20 per cent of the country's gross domestic product. He has insisted the measures will be temporary and that they are aimed at restoring order in Catalonia until local elections can be held.

He will have to proceed carefully. Catalonia's strong economy has been driving much of Spain's recent economic recovery and there are already indications the political crisis is having a negative impact. This week, the Spanish government cut its outlook for economic growth in 2018 to 2.3 per cent from 2.6 per cent because of the crisis and the situation could get worse. A report from the debt-rating agency DBRS said the "uncertainty over the potential independence is discouraging investment and tourism in [Catalonia]." The firm added that "the more elevated and protracted the uncertainty surrounding Catalonia, the bigger the drag on the overall Spanish economy." Spain's benchmark stock index fell 1.4 per cent on Friday and the yield on the country's 10-year bonds jumped reflecting investor wariness.

"This vote [for independence] is setting the scene for a dangerous and destabilizing confrontation with the Spanish state – Catalonia will not be recognized as an independent state by any major powers over the near term, and certainly not by the EU," said Peter Ceretti of the Economist Intelligence Unit. "A long period of attritional conflict now seems probable, slowly eroding the prosperity that Catalonia and particularly its capital, Barcelona, have enjoyed in recent decades."

The deepening crisis in Spain is also proving troubling for the European Union. EU leaders worry that a heavy-handed response by Madrid will fuel independence movements elsewhere in the bloc including in Italy, Britain and Belgium. The Italian regions of Lombardy and Veneto are pressing for more autonomy and politicians in Scotland have voiced strong support for Catalonia's right to self-determination. Spain's Basque Country separatists have also welcomed Catalonia's declaration of independence while sovereigntists from Flanders and Quebec have followed events closely. Fearing any hint of disunity, EU leaders have firmly backed Mr. Rajoy and on Friday they came out against Catalonia's declaration.

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"No one in the European Union is going to recognize that declaration," said Antonio Tajani, president of the European parliament. Officials in Britain, France and Germany echoed those remarks; Canada and the U.S. expressed support for a united Spain as well.

However, Donald Tusk, head of the European Council which represents EU leaders, took a more cautious approach and urged negotiation. Mr. Tusk said Spain will remain the EU's "only interlocutor" but he added: "I hope the Spanish government favours force of argument, not argument of force."