The cabinet agreed to the sweeping labour reforms, deemed essential for reviving the economy and fending off a Greek-style debt crisis, despite a union call for a general strike against them.
The reforms, which make it easier and cheaper for firms to fire workers -- must still be voted on by parliament where the government is seven seats short of a majority.
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The assembly last month passed a 15-billion-euro government austerity package, which includes cuts in public sector wages, by just one vote.
Spain plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom and only returned to tepid growth this year.
The crisis has sent the unemployment rate soaring to more than 20 per cent, the highest in the European Union after Latvia.
The high unemployment has in turn caused government spending on jobless benefits to skyrocket, pushing Spain's public deficit to 11.2 per cent of gross domestic product last year, the third highest in the eurozone after Greece and Ireland.
Spanish business daily El Economista said the IMF, the European Union and the US Treasury had drawn up a rescue plan for Spain including a credit line of between 200 and 250 billion euros.
The plan would use money from a special-purpose fund worth up to 500 billion euros put in place last month to help eurozone nations that run into Greek-style debt problems, it added.
The IMF, the European Commission and the Spanish government have denied any bailout is in the works.
Jean-Claude Juncker, head of the eurogroup of finance ministers, also said he had seen no indication "that Spain will be in a position where it has to ask" for the emergency funds.
But the speculation was fueled when IMF chief Dominique Strauss-Kahn announced he would hold talks with Spanish Prime Minister Jose Luis Rodriguez Zapatero in Madrid on Friday.
Strauss-Kahn stressed it would be a "working visit" and again dismissed the talk of a bailout for Spain.
"I go to all the European countries. I am in France (today) - are there such rumours about France?" he asked.
The IMF warned last month that Spain's economy needed "far-reaching and comprehensive reforms" of its rigid labour market and banking sector if it wants to solve its huge debt and deficit problems.
Bank of Spain governor Miguel Fernandez Ordonez meanwhile also called for rapid implementation of restructuring measures, including those to "improve the competitiveness of the Spanish economy".
The government pushed ahead with its own version of the labour market reforms after talks with the unions and employers collapsed last week.
Spain's two largest unions, the CCOO and the UGT, which represent over two million workers, for a general strike on September 29 to protest the plan.
Workers on full contracts are currently entitled to severance pay of as much as 45 days per year worked, one of the highest levels in Europe. Under the government reform, this would be reduced to 33 days for some contracts.
Many economists blame the high jobless rate on the high cost of firing workers in Spain, which makes employers reluctant to hire staff and encourages the use of temporary contracts that have few benefits and rights.
But some analysts said the latest plan does not go far enough.
"We remain unconvinced that the reform is decisive enough, in particular regarding flexibility at the company level," said Javier Perez de Azpillaga of Goldman Sachs ECS Global ECS European Research.
"Without a clear framework to facilitate higher functional and wage adaptability, the rebalancing of the economy towards net exports will proceed at a more gradual pace."
The government has also encouraged the rapid consolidation of the country's 45 regional savings banks to weather the uncertain economic outlook sparked by the collapse of the property sector.
But public finances could be further strained after the Bank of Spain revealed that these regional banks have requested around 11 billion euros from a state restructuring fund to carry out merger plans.
The banks had until this week to request financing from the Fund for Orderly Bank Reconstruction (FROB), which was set up in June last year to help the struggling saving banks merge or restructure.
