The National Securities Market Commission (CNMV) has to announce by Friday whether it will extend the ban, which was imposed in July during a massive sell off in Spanish sovereign debt and shares.

Stocks and bonds have since rallied following a European Union-financed rescue for troubled banks, and Spanish lenders are now finding it easier to raise funding on the markets.

A CNMV spokesman declined to comment on what the agency will decide. But with sentiment on Spain vastly improved, analysts believe the ban on short-selling when an investor bets that prices of an asset will fall can now safely lapse.

"They have no reason anymore to maintain this ban. The debt risk premium is less volatile and that may be the right time," said Ivan San Felix, analyst at Renta 4 brokerage.

The IBEX blue-chip index has soared 40 percent since July, while the risk premium on Spain's 10-year benchmark bonds over comparable German bonds has fallen by 300 basis points since its July peak of 640 basis points.

Many Spanish stocks have hitched a ride on the sovereign spread reduction, soaring as the government took advantage of sinking borrowing costs to sell billions of euros of bonds in January and complete 14 percent of its 2013 fund-raising needs.

The short-selling ban was originally imposed for three months and was renewed in October for the same period, which ends this week. Italy, France and Belgium have already lifted short-selling limitations introduced at the same time. Only Spain and Greece continue to restrict the practice.

A new EU short-selling law came into force in November, so short-sellers know that the European Securities and Markets Authority, or ESMA, can step in rapidly in a coordinated way in the future in case of speculative attacks.