Madrid is seeking a guaranteed veto on post-Brexit relations between the EU and Gibraltar, the British enclave on Spain's southern tip, and has threatened to scupper the draft Brexit deal if it doesn't get its way.
"If there's no agreement" over Gibraltar, Sanchez said at a press conference in Cuba, "there very probably won't be a European Council" summit.
Earlier on Friday, Spanish officials in Brussels said Sanchez might not attend the summit if London fails to put into writing a promise that no future agreement between Britain and the EU that applies to Gibraltar can be signed without first being negotiated on a bilateral basis with Spain.
That would effectively give Spain the power of veto over any future relations between the EU and the 2.6 square mile (6.8 square kilometer) British territory on its southern tip.
Sanchez wouldn't confirm that threat to skip the summit but said current "guarantees are not enough and so Spain maintains its veto on the Brexit deal." "If there's an agreement, we'll obviously go." An original clause in the deal Britain has drawn up with the EU gave Spain it's guarantees, but that has since disappeared from the final draft.
Although the legal service of the EU Council has tried to reassure Spain that the current text does not preclude this, Madrid wants that veto power clearly spelled out.
"We have demanded that it be published by the British authorities before the European Council on Sunday," Luis Marco Aguiriano Nalda, state secretary for European affairs, told reporters in Brussels.
Both British and EU negotiators said that the withdrawal agreement itself would not change at this stage, but in London a spokesman for the prime minister's office had earlier said: "We will work with the governments of Gibraltar and Spain on our future relationship."
Should EU leaders sign off on the deal, British Prime Minister Theresa May would still have to convince her own parliament to back it, something seen as a greater challenge.
"If this deal does not go through, we are back at square one. What we end up with is more division and more uncertainty," said May.