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Madrid believes an agreement that allows the overseas territory to benefit from any British free-trade pact with the European Union could be struck in October. Under the terms of the UK’s EU Withdrawal Agreement, Spain has a veto over Gibraltar benefiting from any future trade and security agreement between the Government and Brussels. During the divorce talks, the Spanish government was often accused of using Brexit to snatch back the territory, which was handed to Britain in 1713 after the signing of the Utrecht Treaty.

EU affairs minister Juan Gonzalez-Barba said an agreement on Gibraltar’s future relationship with Spain and the EU “will not be easy” given Madrid’s “unrenounceable sovereignty aspirations”, potentially sparking panic on the Rock.

The Spaniard said the UK’s decision to quit the bloc had been motivated by similarly strong urges for sovereignty.

Speaking to the Spanish parliament’s EU committee, he added this would make it “enormously difficult” to reach an agreement with the British Government.

He added there was “maximum interest to achieve this, certainly on the part of Spain, but we think, also on the part of the United Kingdom”.

Mr Gonzalez-Barba held initial talks with the UK, and also Gibraltar’s First Minister Fabian Picardo, which helped draw out the scope of a possible agreement.

“The idea is to sign the agreement in October; that would be perfect,” he added.

During his discussions with UK officials, Mr Gonzelez-Barba highlighted Spain’s veto over whether Gibraltar should be allowed to participate in any agreement signed between Britain and the EU.

But he claimed it would be hard for Madrid to exercise it, adding the capital’s willingness to hold talks over the Rock showed that.

“It’s not simple to veto a European Council, more so on such a national issue, and as such the rest of the EU members, the principal negotiator Michel Barnier and the British and Gibraltarians realise the essential importance that this dossier holds for Spain,” Mr Gonzalez-Barba told the committee.

“We hope to close an agreement, despite its enormous difficulty, by the month of October.

“That would be ideal, in order that the negotiator can incorporate it into the final Brexit agreement, because it has both EU aspects and bilateral aspects.”

Hinting at a more ambitious deal for Gibraltar, he added that 96 percent of voters on the Rock in the 2016 EU referendum had backed remaining inside the bloc.

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“This is a complicated situation that as negotiators we have to consider, but that the British and Gibraltarians also have to consider,” he concluded.

Spain wants a bilateral agreement to include provisions on tax evasion, police cooperation and tobacco smuggling before the full terms of any UK-EU trade agreement can be applied to the Rock.

Meanwhile Germany has warned trade talks with Britain are likely to go well into October before a deal is found.

An internal document by its Foreign Office revealed that Angela Merkel doesn’t believe an agreement will be found next month, like suggested by Boris Johnson.

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“From September, the negotiations enter a hot phase,” the document, obtained by Reuters, said.

“Britain is already escalating threats in Brussels, wants to settle as much as possible in the shortest possible time and hopes to achieve last-minute success in the negotiations.”

The German Foreign Office confirmed that no deal planning should be increased because of Britain’s refusal to extend the post-Brexit transition period beyond the end of the year.

The document added: “It is therefore important to preserve the unity of the 27, to continue to insist of parallel progress in all areas and to make it clear there will be no agreement at any price.

“Therefore, both national and European contingency planning would now have to start in order to be prepared for no deal 2.0.”

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