If the vote goes though, Mr Rajoy will be the first Spanish prime minister to lose a no-confidence vote.
"I will accept as a democrat the result of the vote as it is well-known", Mr Rajoy said.
Sanchez's Socialist Party (PSOE) secured enough cross-party parliamentary support, including from Basque and Catalan nationalist parties, to push through the no-confidence motion.
The impending downfall of Rajoy's government after ruling for almost eight years came just days after the Popular Party's reputation was badly damaged by a court verdict that identified it as a beneficiary of a large kickbacks-for-contracts scheme.
Earlier on Thursday, Socialist leader Pedro Sanchez demanded Rajoy step down, arguing he had lost credibility after the court ruling, though the PP's number two Maria Dolores de Cospedal later ruled out his resignation before the vote. Sanchez and his party are staunch supporters of the European Union and the euro currency shared by 19 European Union nations.
Rock's post-Brexit future relations with Spain and the EU.
But yesterday the political landscape in Spain was fractured and in turmoil, with passions running high.
Spain's prime minister has been ousted in a vote of no confidence following a corruption scandal.
But PP lawmaker Rafael Hernando told him he would be entering the prime minister's office "through the back door" after failing to win the vote in 2015 and 2016.
"Mr Rajoy, your time is up".
"We needed Rajoy to leave his party now, with all the corruption it's accumulated, and we needed change now", she told AFP.
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That was short-lived, though, as party activists re-elected him as party head in primaries in May 2017, but even then the Socialists were often sidelined as Podemos, centre-right Ciudadanos and Rajoy's PP took centre stage in politics.
Sanchez promised to abide by a national budget recently negotiated by Rajoy. There were 169 no votes and one lawmaker abstained.
He also said Mr Sanchez was being a "parasite" by using weak alliances with anti-establishment, far-left and nationalist political groups in the Basque and Catalan regions to stage a power grab.
The Socialists governed before Mr Rajoy took office at the end of 2011, at the height of the financial crisis. Last year, gross domestic product growth reached 3.1 per cent.
Mari Angeles Suarez, a 65-year-old pensioner, said she had come to parliament with her husband to witness Rajoy's demise.
The judges sentenced 28 other businessmen and politicians associated with PP to a combined total of 351 years in jail for crimes relating to fraud, embezzlement and money laundering.
Rajoy's likely removal follows corruption convictions last week involving former members of his conservative Popular Party.
Rajoy became Spain's first sitting prime minister to give evidence in a trial when he was called as a witness past year. There are only 84 Socialist deputies in the 350-member legislative assembly.
What happened in the next 10 months was an unprecedented political crisis marked by inability among Rajoy's bickering rivals to agree on forming an alternative government and fresh elections which the PP won again.
Rajoy was defiant. "Why should I have to resign, if for now I still have the trust of the house, and the trust awarded to me at the ballot boxes?"