* Catalonia faces direct rule imminently unless it drops secession
* Leader pledges to confirm secession if Madrid takes over
* Showdown sends shockwaves across Spain, growth forecasts slashed
* Leading bank considers relocation of top management (Recasts with Catalan leader to formally declare independence)
By Isla Binnie and Sam Edwards
MADRID/BARCELONA, Oct 18 (Reuters) - Catalonia’s leader pledged to press ahead with his independence bid if Spain moves to suspend the region’s autonomy, a regional government source said on Wednesday, hours before a deadline over keeping the euro zone’s fourth-largest economy united.
Prime Minister Mariano Rajoy has given Catalan president Carles Puigdemont until 10 a.m. (0800 GMT) on Thursday to renounce a secession bid which has rocked markets and rattled the euro, or face direct rule from Madrid.
Puigdemont made a symbolic declaration of independence last week and promptly suspended it to ask for talks with Madrid. The source said he would now lift that suspension if Rajoy exercised so-called Article 155 of the Constitution to take back power.
“The president said (at) his party’s meeting that he will lift the suspension of the independence declaration if the government executes Article 155,” the source said.
That article, which has never been used during Spain’s four decades of democracy, allows central government to take over any of its 17 autonomous communities if they break the law, which Madrid says Catalonia has done by holding a referendum on independence and pushing for a break-up.
Even though it is not clear what direct rule will look like, the prospect has raised fears that social unrest could add to the turbulence, on the heels of an exodus of hundreds of Catalan firms and cuts to economic growth forecasts.
In the latest grim prediction, Spain’s independent budget watchdog warned this week that continued uncertainty could wipe as much as 12 billion euros off potential economic growth next year, cutting forecasts by between 0.4 and 1.2 percentage points.
Catalonia accounts for 20 percent of Spain’s GDP.
If Rajoy triggers the article on Thursday, it will take between three and five days for the government in the wealthy region to be effectively stripped of its powers.
“If autonomy is suspended we will have to move in a hurry,” the source said.
Disappointed that last week’s declaration was merely symbolic, pro-independence parties in Puigdemont’s ruling coalition are now pushing for a formal vote in the Catalan parliament.
Earlier on Wednesday, Rajoy urged Puigdemont to “act sensibly” and scrap the bid or risk direct rule, a move which would need only a vote in Spain’s upper house, where Rajoy’s People’s Party holds an absolute majority.
The premier repeated a call for clarity on the matter.
“It’s not that difficult to reply to the question: Has Catalonia declared independence? Because if it has, the government is obliged to act in one way, and if it has not, we can talk here,” Rajoy said in parliament.
A central government source later said Madrid viewed a formal independence declaration as “unacceptable blackmail”.
“VOLATILITY AND CONFRONTATION”
Since an Oct. 1 independence referendum which Madrid branded illegal, some 700 companies have moved their head offices from Catalonia, according to Spain’s companies registry.
Despite a violent crackdown by Spanish police to thwart the vote, Catalan officials say 43 percent of voters still managed to cast ballots in the referendum with 90 percent in favour of breaking away.
Banco Sabadell, Spain’s fifth-biggest bank, is considering moving its top management to Madrid.
Tourism, a vital part of the Catalan economy centred on its seaside capital Barcelona, has also taken a hit, with activity falling 15 percent so far this month, industry association Exceltur said on Tuesday.
The region’s tourism industry could make 1.8 billion euros ($2.12 billion) less than usual in the fourth quarter “if the volatility and confrontation get worse in the coming months”, Exceltur said in a statement.
Authoritative Catalan newspaper La Vanguardia reported that Madrid plans to appoint its own delegates to run regional government departments. Puigdemont would remain nominally in his role but stripped of all powers.
Foreign Minister Alfonso Dastis said last week that it was not clear what measures the government would take if direct rule were imposed, but said the government would work on it.
La Vanguardia said Puigdemont, a 54-year-old former journalist, was mulling declaring independence and calling so-called constituent elections for the newly declared republic.
But Catalan foreign affairs chief Raul Romeva told a news conference in Brussels: “Elections are not on the table now.”
Tempers have flared since the jailing on Monday of two separatist leaders, pending an investigation for alleged sedition.
Tens of thousands of protesters gathered along Barcelona’s Diagonal Avenue on Tuesday to call for their release, whistling and shouting “freedom” and “out with the occupying forces”.
$1 = 0.8506 euros Additional reporting by Jesus Aguado, Inmaculada Sanz, Andres Gonzalez and Paul Day in Madrid; Writing by Isla Binnie; Editing by Peter Graff and Sandra Maler