The move has long been talked about by sympathisers of the left-leaning government but fiercely resisted by Franco's family and many on the right. It revives old tensions from Spain's civil war in the 1930s and the subsequent four decades of Franco's rule.
She said the body will be taken to the Mingorrubio-El Pardo state pantheon, where Franco's wife is already buried.
Franco is currently buried in a huge hillside mausoleum belonging to the Catholic Church in the Valley of the Fallen, where it draws visits from tourists and demonstrations by right-wing sympathisers.
His government gained the Vatican's approval for the exhumation.
Sanchez's government rejected a proposal by Franco's family to relocate him to Madrid's main cathedral, fearing it would become a place of pilgrimage for sympathisers.
"When you attack Franco, you attack my family, over half of Spain, the monarchy and the Church which protected him," Franco's great-grandson Luis Alfonso de Borbon said in an interview published in conservative daily newspaper La Razon in October.
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