If confirmed, it would be Spain's first coalition government since the country's return to democracy in the late 1970s.
However, even with a deal, the two parties still need to find more allies.
The Socialists and Podemos had tried and failed to strike a government deal after the April election, prompting Sanchez to call the repeat ballot.
The agreement, announced two days after Spain's general election on Sunday, marks an attempt to end a political deadlock that has forced Spaniards to go to the polls four times in as many years.
"Our desire is to achieve majority support in the chamber", he said, indicating they would approach other factions "to achieve a stable and sustained majority that would make possible not only an investiture vote but a legislature".
"We have reached an agreement to form a coalition government between Unidas Podemos and PSOE", Mr Alberto Garzon, leader of Podemos ally Izquierda Unida, said in a verified tweet.
Mr Iglesias said: "As I said on election night after hearing the results, what was a historical opportunity in April has become a historical necessity".
Both the Socialists and Podemos lost seats compared to April's election, with Sanchez's party taking 120, down from 123, while Podemos secured 35, down from 42.
The small leftist Mas Pais ("More Country") party won three seats, so the two bigger leftist parties would have to draw others in to boost their combined 155-seat tally.
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But most important would be the backing of centre-right Ciudadanos, analysts said.
Sanchez said he start talks with additional parties to reach a majority.
Centre-right party Citizens Party (Ciudadanos), which saw its support collapse to win just 10 seats, said it would not back the deal, calling instead for a grand coalition between itself, the Socialists and PP.
The right wing parties in Spain have accused Sanchez of being too soft on the Catalan independence movement.
"Ciudadanos can not support Sanchez and Podemos holding the reins of Spain's government", a party statement said, saying it would be "detrimental to the interests of most Spaniards".
Iglesias said that the coalition would bring together PSOE's experience and the courage of Podemos.
The two leaders have said that the coalition will form a "progressive government made up of progressive forces that are going to work for progress".
"It no longer worries him that Pablo Iglesias will be in his government but there are many Spaniards who will be anxious by this deal that they've just announced", Casado tweeted.
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