Instead Ercros is to try to renegotiate its loans with its bankers and to press on with attempting to obtain fresh capital from new shareholders.
The decision means the Kuwait Investment Office, which controls 40 per cent of the company through its Spanish holding group Torras, has pulled back from a major confrontation with the Spanish government.
But it is still likely to provoke controversy. A survival plan drawn up by the Ercros board involves the loss, at least temporarily, of around 3,000 of its 11,000 workforce.
Ercros has bank debts of more than pounds 500m, more than half of it short term, and its need for fresh capital is acute.
But the KIO, which handles the investment of the oil state's revenues, is under pressure to feed Kuwait's post-Gulf war needs for capital for reconstruction, and has proved less than keen to pump more money into Spain, especially into the ailing chemical sector.
So the Kuwaitis have been refusing to back a vital capital injection for Ercros unless the Spanish government also puts more cash into the debt-laden group - something that would almost certainly see it fall foul of EC anti- subsidy rules.
The two sides have engaged in brinkmanship - Ercros's board, in emergency session on Monday, dramatically suspended its meeting to have crisis talks yesterday morning with Claudio Aranzadi, the Spanish industry minister, in a last-ditch effort to change the government's mind.
That seemed to have failed when Mr Aranzadi emerged to insist that the Spanish government would not volunteer new funds. It looked increasingly likely that the board would have no choice but to decide to seek to suspend payments to its creditors.
But after the reconvened board meeting finished, Josep Pique, Ercros's acting chairman, made it clear there would be no suspension of payments and seemed hopeful that the estimated Ptas25bn ( pounds 140m) needed by the group to meet its short-term commitments could be found.
A spokesman for Torras made it clear that the intention was, if possible, for shareholders to make loans rather than inject fresh capital into the company.
Nevertheless, the Kuwaitis do appear to be pulling back on their original insistence that no fresh money would be forthcoming without an equivalent government commitment.
Hopes partly hinge on Freeport McMoRan, the New Orleans- based commodities group. The two already have a deal on the table under which the American company would buy a majority stake in Fesa-Enfersa, Ercros's fertiliser subsidiary, which is responsible for more than half of its consolidated debt and the bulk of its losses. But the agreement has been stymied by the KIO's refusal to give Freeport guarantees covering future losses at the subsidiary.
Renegotiation of Fesa's debt, possibly with the aid of Banco Exterior, the state-owned banking group, could be the key to breaking the impasse between the Kuwaitis and the government.
The outlook for Ercros's fortunes took a turn for the worse following the resignation less than a month ago of Javier de la Rosa, as the Kuwaiti's chief adviser and financial partner in Spain. The KIO was swift to reassure the Spanish government of its continuing commitment to its industrial interests.
But the belief that Mr de la Rosa's departure, after 10 years as the KIO's adviser, signalled a more cautious investment stance gained credence when the Kuwaitis made it clear that fresh money for Ercros was conditional on a government contribution.
Nevertheless, the political fall- out from what would be one of Spain's largest corporate failures is clearly an uncomfortable prospect for the low-profile KIO as much as it is for the Spanish government, a factor that probably underlies last night's decision.