By Angus Berwick
MADRID (Reuters) - Spain's acting Prime Minister Mariano Rajoy said on Tuesday he saw no alternative to a repeat of elections in Catalonia after the region's pro-independence bloc fractured over who to name as the new government's leader.
Catalonia, worth a fifth of Spain's economic output, has been unable to form a government since a regional election in September due to disagreements between the winning, pro-independence coalition parties.
If a new candidate is not chosen before Saturday, new regional elections will be called automatically.
The failure to form a Catalan government echoes a political stalemate gripping Spain at a national level following an inconclusive national election on Dec. 20 and increases the likelihood all Spaniards will return to the ballot box this year.
"I sincerely don't know what could possibly happen in the next five days, but I believe that the best that could happen is that (acting regional head Artur) Mas drops his independence drive and, as that doesn't seem possible, there's no alternative to elections," Rajoy said in a radio interview.
The protracted efforts to choose a Catalan leader has dampened a separatist movement that at its peak drew one million people onto the streets of Barcelona, and has highlighted divisions between supporters.
On Sunday, a minority party in the regional coalition, CUP, said it would not support the business-friendly Mas in his bid for another term, a red line for partners Junts pel Si.
Junts pel Si (Together for Yes), which pulled together the center-right CDC party and leftist ERC party to present a united pro-independence front for September's election, said it would stand by Mas, in power since 2010, as their candidate.
A senior official of the CDC said on Monday the CUP had acted as an "ally of the Spanish state" in rejecting Mas.
The leader of the ERC also said, without referring directly to Mas, that no one should resign.
"There are five days left (before the Jan. 9 deadline) and there should be no talk of resigning, we must keep negotiating until the end," Oriol Junqueras said at a news conference.
The prospect of new elections in Catalonia, most likely in March, increases the likelihood of a second national election this year as the receding threat of a strong Catalan government seeking a split from Spain will reduce pressure on Rajoy's center-right People's Party (PP) and the opposition Socialists to form a grand coalition to stand up to a separatist Catalan administration.
Bond markets reacted positively to the bloc's division, with Catalonia's five-year bond yield falling to a three-week low on Tuesday, a few basis points away from is lowest level in around five months.
"Short-term the disagreement is a positive as it delays any independence plans, and potentially pushes for new elections," said Alberto Gallo, head of global macro credit research at RBS.
(Additional reporting by Paul Day, and Dhara Ranasinghe and John Geddie in London; Editing by Angus MacSwan)