The election on Sunday was necessitated after the PSOE fell short of a majority and was unable to form a coalition after the last polls which were held in April.
With 99.30 per cent of the votes counted, the PSOE won 28 per cent of the votes, compared with 28.67 per cent in April, which translated into 120 seats in the 350-seat congress, compared with the 123 they won in April, reports Xinhua news agency.
The conservative Peoples' Party improved on their April performance, and came in second after winning 20.81 per cent of the votes and 88 seats, compared with their record low of 16.69 per cent and 66 seats in the previous polls.
But the big winner was the far-right Vox party, which won 15.10 per cent of the vote and 52 deputies compared to 10.26 per cent and 24 seats in the April vote, to become the country's third most-powerful party.
"Eleven months ago we didn't have any representation in any institution, now we are the third party in Spain," said Vox leader Santiago Abascal.
The PP and Vox both benefited from the almost total collapse of the centre-right Ciudadanos party, whose support fell from 15.86 per cent to just 6.79 per cent, with the number of deputies gained reduced from 57 to 10.
Addressing PSOE supporters after the results came in, Sanchez said it was his priority to "form a stable government and do politics for the benefit of the majority of Spaniards", reports the BBC.
"I would like to make a call to all the political parties because they need to act with generosity and responsibility in order to unblock the political situation in Spain," he added.
Meanwhile, the left-wing party Unidos Podemos also suffered a setback, seeing its number of deputies fall to 35 from 42, although this was slightly offset by the arrival of the new left-wing party Mas Pais, which claimed three seats.
Podemos leader Pablo Iglesias said: "Once again we extend a hand to the Socialist party and Pedro Sánchez,", adding that he was ready to start talks with the party as soon as Monday.
To form a coalition government now, Sanchez's PSOE would need to form alliances with smaller, nationalist parties, according to analysts.
Sunday's general election was the 14th since Spain's return to democracy under the 1978 Constitution.
( With inputs from IANS )