The plan was initially scheduled to be approved at Friday's Cabinet meeting, but will now be cleared at the next ministers' meeting on Aug. 31, Deputy Prime Minister Soraya Saenz de Santamaria said.
Spain must create the "bad bank" as a condition for accessing a loan of up to €100 billion ($125.5 billion) from the 16 other countries using the euro to fix its troubled banks. The banks, eight of which have been nationalized, are loaded with more than €176 billion in bad real estate loans and other investments following the collapse of the property market in 2008.
Spain has for months been trying to avoid following Greece, Ireland, Portugal and Cyprus in having to ask for a rescue of its government finances. Prime Minister Mariano Rajoy has said recently he will consider approaching the eurozone's bailout fund for such government assistance provided the European Central Bank outlines its plans to help bring down the country's sky-high borrowing costs.
Investors have taken flight from Spain as the uncertainty over the whether the country can afford to save its banking sector and indebted regional governments continues unabated. Investors have been demanding high interest rates to lend to the Spanish government. The higher borrowing cost, in turn, is piling more financial pressure on the country.
On Friday, Saenz de Santamaria and the European Commission denied a news report that Spain was already negotiating new bailout terms and conditions with Brussels. Commission spokesman Simon O'Connor did admit talks were going on with Spain on a number of issues and levels.
Some experts say it is only a matter of time before Spain accepts government rescue loans and that it would help, not hurt, investor confidence in the country.
Ratings agencies Fitch and Standard & Poor's have said this week that a bailout request by Spain would not prompt a credit rating downgrade.
Fitch said that a rescue deal by European financial agencies and the European Central Bank in the form of bond purchases would ease borrowing pressure for Spain and provide it with breathing space to implement ambitious fiscal and economic reforms.
Friday's Cabinet meeting produced good news for some of Spain's near 6 million unemployed: the government extended a policy under which long-term unemployed people receive monthly payments of €400. It boosted the stipend to €450 for those who have at least three dependents but axed it from those living in households with incomes of up €8,000.
Spain is also preparing legislation that will allow the country's central bank to intervene earlier when a lender falls into trouble as well as giving its bank rescue fund powers to shut them down if they fail to come up with survival plans.
The results of a comprehensive audit of all Spanish banks are expected next month.
Harold Heckle contributed to this report.