BBC News Online: World: Europe

UK and Spain sign Gibraltar deal

But the agreement does not resolve the argument between Britain and Spain over sovereignty.

Gibraltar remains a British overseas territory claimed by Spain.

'Post box' arrangement

For years, Spain has been blocking EU directives because it does not recognise the Gibraltar government as a competent authority.

It will be the channel for communications between Gibraltar and European governments.

Spain can send a message to Gibraltar through the post box, arguing if necessary that it is dealing only with Britain.

London welcomed the agreement as upholding the constitutional position of Gibraltar while removing a major obstacle to EU business.

Benefits

The agreement also clears the way for official police cooperation between Gibraltar and Spain, which has in the past branded the British territory as a haven for smuggling, allegations strongly rejected by Gibraltar's government.

As a result, London will sign up to the police and judicial cooperation aspects of Schengen Agreement, which allows passport-free travel for EU citizens.

However, Britain will not surrender control over its borders.

"Britain, uniquely within the European Union, will retain its right to maintain its own border controls," British Foreign Secretary Robin Cook said.

Various European directives in this field are now unblocked, as well as others covering finance and business. These include legislation on company take-overs and insolvency.

The Spanish crown signed over "The Rock" of Gibraltar to Britain under the 1713 Treaty of Utrecht, but Spanish governments have attempted to recover the six square kilometres ever since.