Speaking during a break in talks between UK Prime Minister Tony Blair and his Spanish counterpart Jose Maria Aznar, Mr Blair told reporters that Kosovo had been dominating the meeting.

Jon Devitt: "Dispute over Gibraltar unlikely to be resolved at this meeting"

But when pressed to answer questions about Gibraltar during joint statements on the steps of Chequers, the prime minister's country residence, both men said they would discuss the colony "with discretion".

Mr Aznar said Britain and Spain were "facing up to the problem and we will talk about it as necessary".

The Spanish premier added that discussions would be conducted "with as little as we can in public".

Gibraltar has been a source of dispute between the UK and Spain since it was ceded to the British in 1713.

The BBC's Jon Devitt: "On paper they are unlikely allies"

A row developed earlier this year after a police boat from the strategically-important rocky outcrop boarded a Spanish fishing vessel in disputed waters.

Spain retaliated by introducing a strict system of checks for vehicles leaving and entering Gibraltar, resulting in massive inconvenience for the many Spaniards and Gibraltarians who commute across the border daily.

The situation stopped short of the full-scale blockades of the past, with a UK appeal to Spain to act in accordance with European law.

Checks led to border queues in Gibraltar

Mr Aznar may still seek a response to a report published earlier this year and given to Mr Blair in February that branded Gibraltar a safe haven for tax cheats and drug smuggling.

Europe has also been high on the agenda at Chequers. Mr Blair first announced a new joint working group to discuss reform of the European Union.

The two men then issued a joint declaration in praise of the euro as providing "a basis for prosperity and growth".

Jose Maria Aznar: Similar policies to Mr Blair

But they agreed that a single currency could not guarantee economic success without more flexible labour markets to make Europe more competitive and create more jobs.

They also promised tough action on anti-competitive practices like cartels and state grants to industry.

Pinochet on the agenda

The prime ministers were also expected to talk about General Augusto Pinochet, who has been under house arrest in the UK since an extradition request was made by Spain last October.

The former dictator is wanted for crimes allegedly committed against Spanish nationals during his 1973 to 1990 rule in Chile.

UK Home Secretary Jack Straw is due to make a decision in the near future on the general's extradition, after the Law Lords said he did not enjoy sovereign immunity from prosecution.

Kosovo refugees

Discussions on Kosovo reflected the UK and Spain's status as Nato allies, with the two men restating their determination to force Serbian President Slobodan Milosevic to back down.

The Kosovo Albanian refugee situation was also discussed. Spain has already offered to take 7,000 people displaced by Serb aggression in the province.