"We are celebrating 40 years of a democratic Spain, of a stable and mature constitutional order... and this is not compatible with a public tomb where we continue to glorify Franco," Deputy Prime Minister Carmen Calvo told a news conference following a cabinet meeting that approved the decree.
The exhumation, which is fiercely opposed by the late dictator's descendants, could take place at the end of the year, she said, declaring: "We can't lose a single minute."
The decree will still have to be approved in parliament.
Prime Minister Pedro Sanchez, who came to power in June after he ousted his conservative predecessor in a confidence vote, has made removing Franco's remains from the monument in the Valle de los Caidos (Valley of the Fallen) near Madrid one of his priorities.
"As an established and European democracy, Spain cannot allow for symbols that divide Spaniards," Sanchez told public broadcaster TVE shortly after he came to power, saying such a mausoleum would be "unthinkable" in other European nations that had fascist dictatorships like Italy and Germany.
Sanchez's Socialists say the goal is to convert the site into a place of "reconciliation" and memory for all Spaniards.
- Visitor numbers up -
General Franco, who ruled Spain with an iron fist from the end of the 1936-39 civil war until his death in 1975, is buried in an imposing basilica carved into a mountain-face just 50 kilometres (30 miles) outside of Madrid with a 150-metre (500-feet) cross towering over it.
Built by Franco's regime between 1940 and 1959 -- in part by the forced labour of some 20,000 political prisoners -- the monument holds the remains of around 37,000 dead from both sides of the civil war, which was triggered by Franco's rebellion against an elected Republican government.
It was long used as a place to pay tribute to Franco on the anniversary of his death, but that was stopped by a 2007 law.
Franco, whose Nationalist forces defeated the Republicans in the war, dedicated the site to "all the fallen" of the conflict in an attempt at reconciliation but critics say it is unacceptable to give such ostentatious recognition to a brutal dictator.
And they say the families of the Republicans were never told about their transfer to the valley.
Critics compare the situation with neighbouring Portugal, where late dictator Antonio de Oliveira Salazar is buried in a municipal cemetery, or Italy, where former fascist leader Benito Mussolini lies in a family crypt.
Visitor numbers to the site have soared since the government announced its plans. Spain's national heritage agency that runs the monument said over 38,000 people visited in July compared to over 23,000 in June.
- 'Our worst past' -
Sanchez's minority government argued that Franco's exhumation was backed by a non-binding motion that was approved last year in parliament but ignored by the former conservative government.
The decree is now expected to pass in parliament as it is supported by far-left party Podemos as well as Catalan separatist parties and a Basque nationalist party.
But it is fiercely opposed by Franco's descendants who are refusing to take his remains to the family sepulchral vault, and the main opposition conservative Popular Party (PP) which has warned it will challenge the decree in court.
"It is more important (to Sanchez) to revive the ghosts of the past than to try to seduce people with the future. He is more interested in opening the wounds of our worst past than in concentrating on our better present," new PP leader Pablo Casado told reporters Thursday.
The deputy prime minister said that if Franco's family refuses to transfer the late dictator's remains to the family vault, the government will pick a spot to bury him.
Aside from removing Franco's remains, the government announced last month that it wanted to establish a truth commission on wrongdoings during the civil war and dictatorship, and annul politically motivated Franco-era court decisions.