The vote will be held November 29.
In recent weeks, Spaniards have demanded solutions from the government over housing affordability, holding protests in cities across the country after public outrage grew over the televised eviction of an 87-year-old woman in Madrid in September.
Right-wing opposition parties last week joined forces to scuttle two emergency decrees in parliament that included measures to reduce evictions and real estate speculation.
The setback sparked wide speculation that Sanchez could consider moving up a national election that would have otherwise taken place in 2027.
In a televised address, Sanchez argued that a broader progressive coalition in parliament would allow Spaniards to tackle the biggest issues facing the country.
"The time has come, therefore, for the Spanish people to decide what future you want for yourselves and for your country," Sanchez said on Monday.
Sanchez, 54, has been Spain's prime minister since 2018, making him one of Europe's longest-standing leaders.
He has become one of the leading international progressive heads of government thanks to his defence of migration, his diplomatic efforts to defend Palestinians and his criticism of the American and Israeli war against Iran.
He has also enjoyed one of the fastest growing economies in the developed world in recent years.
But back home, the Spanish leader has been hemmed in by a series of legal cases involving his Socialist party as well as his wife and brother, who both deny wrongdoing.
He has also struggled to account for this summer's border crossing by tens of thousands of mostly Moroccans into Spain's North African territory of Ceuta, where a humanitarian crisis remains two months after the initial crisis.
He has led a coalition minority government along with the left-wing junior partner Sumar since 2023.
But his reliance on several smaller parties to get anything done has hamstrung his legislative ability.
Throughout his political career, Sanchez has earned a reputation as a political escape artist capable of winning elections he looked set to lose.
Speculation around whether he would call snap elections centered on the momentum that his party might now have around issues of affordability, while the opposition Popular Party - which holds the most seats in parliament already - is likely to define the contest around corruption.
"Sanchez is choosing this moment because it is arguably the best time to do so, given that the issue of housing frames the electoral conflict or debate in terms that are highly favourable to (his party's) position," said Oriol Bartomeus, a professor of political science at the Autonomous University of Barcelona.
"Sanchez can frame the election - or has realised he can frame it - in very classic left-versus-right terms," Bartomeus said.
The Socialist leader will face Popular Party leader Alberto Nunez Feijoo, who aims to take control of the government.
"At last, the Spanish people will decide," Feijoo said Monday after the announcement of the the snap election.
"These aren't elections like the previous ones. This is about Spain beating Sanchez."
The formal dissolution of parliament will need to be approved by the cabinet, which Sanchez has convened for later on Monday.
