The popular app which links passengers with drivers of private vehicles was given the green-light by the European Union recently.
But Spain's public works and transport ministry responded on Monday by saying users could be slapped with fines of up to €600 ($800).
Authorities then backtracked on the issue on Tuesday after the European Commission described the measure as "extreme" and asked for Spain to seek a solution to the problem.
A spokesperson for the public works and transport ministry said, however, they would still target drivers using the Uber service to make a profit.
It is not yet clear how this will work in practice.
Taxi drivers in Spain, however, are still calling for tougher action, saying the app, worth an estimated $13 billion, creates unfair competition. A 24-hour strike is planned in Madrid for 6am Wednesday to 6am Thursday.
On Tuesday, the Spanish government said carpooling websites like BlaBlaCar were legal as long as drivers and passengers have a private arrangement.
Sharing costs for a trip did not count as 'financial renumeration' said the government.