Sanchez told LaSexta TV on Thursday the move should further allay the political conflict between Madrid and the wealthy northeastern region of Catalonia after its failed independence bid in 2017.
"Tomorrow we will present a legislative proposal to reform the crime of sedition and replace it with a crime more or less adjusted with what European democracies such as Germany, France and Switzerland have, with penalties as in those democracies," he said.
He did not provide further details, but said the bill would requalify sedition, a crime that has been in the Spanish penal code since 1822, into "aggravated public disorder".
"Spain has changed to the better since 1822," he added.
Sanchez, whose minority leftist government depends on parliamentary support of smaller regional parties to pass legislation, rejected suggestions the proposal was meant to win approval of next year's budget with the help of Catalonia's leftist ERC party.
"The pro-independence movement does not seek a reform of the penal code, but an amnesty, which is not something we will accept," Sanchez said.
The first reaction from Catalonia was positive, however.
"The elimination of the crime of sedition is an indispensable step... We continue to work to completely end the repression and be able to vote in a referendum," regional government chief and ERC leader Pere Aragones wrote on Twitter.
Last year, Spain pardoned all nine separatist leaders sentenced in 2019 to between nine and 13 years in prison for sedition and misuse of public funds, but some who fled Spain in 2017 remain in exile.
(Reporting by Andrei Khalip and Belen Carreno; Editing by Lincoln Feast.)