Catalonia, Spain's most indebted region, said Tuesday it could not pay subsidies in July to hospitals, old age homes and other social services already reeling from sharp budget cuts.
"It is due to a problem of liquidity," said a spokeswoman for the Catalan regional government's economy ministry, adding that the situation "will start to return to normal in September."
Catalonia last week said it was considering tapping a new central government fund worth up to 18 billion euros ($22 billion) set up to help regional governments in difficulty.
But it is in conflict with the central government over tough deficit and debt targets imposed on the regions.
In protest, the Catalan government boycotted a meeting with Budget Minister Cristobal Montoro in Madrid Tuesday at which regional finance officials approved the government's debt limits for the regions.
The Catalan government would not say how much money in grants it would not be able to pay, but left-leaning daily El Pais put the figure at 400 million euros.
The measure prompted outrage among social services agencies in this northeastern region, which accounts for about a quarter of Spain's total economic output.
About 100,000 workers could be deprived of their salaries for the month of July, according to the Catalan Confederation of Social Services Associations, which groups around 800 such bodies.
"There is a feeling of disappointment and worry," said the association's director, Laia Grabulosa, adding that the agencies that are affected "provide basic services to very fragile people".
"We want a calendar for payments and we want to know when we are going to receive the money for the month of July."
Sonia Martinez, president of the Catalan Federation of Child Care and Education Organisations which groups nearly 400 agencies that look after nearly 2,000 children, shared her concerns.
"This is very bad. It affects the maintenance of premises, water supply, electricity. These are children who are under our care round the clock," she said.
"We have to educate them, feed them, take care of them and this needs a lot of staff."
The federation failed to receive at least five million euros in grants that are owed it by the Catalan government for the month of July, Martinez said.
The Catalan government has already cut public sector wages, introduced a one-euro charge for each medical prescription and frozen infrastructure investments as it seeks to bring its public deficit under control.
The debt burden of Spain's 17 regional governments is a focus of market fears that strains on the national finances could drive the country to seek a full bailout, on top of a 100 billion euro ($123 billion) credit line agreed recently for its banking sector.
Some in the social services sector remained optimistic.
"It caught us by surprise," said Angels Guiteres, president of a federation that represents 4,000 social service agencies and firms.
"But it is a one-off problem. The (Catalan) government has said the situation will return to normal in August or September."
Spain's central government has ordered the country's 17 powerful regional governments to reduce their deficits to 1.5 percent of their gross domestic product this year and 0.7 percent in 2013.
At Tuesday's meeting a majority of the regions approved an overall debt ceiling of 15.1 percent in 2012 and 16 percent in 2013.
While Catalonia stayed away, Asturias and the Canary Islands voted against the limits and Andalucia's treasury councillor Carmen Martinez Aguayo walked out without voting.
She told reporters the limits would mean "indiscriminate and totally illogical cuts in services such as health and education."