Ministers have abandoned hope of reaching a deal with Spain over Gibraltar's future.
It faces diplomatic deadlock after 99 per cent of the colony's citizens rejected any form of power-sharing in a referendum last month called by Peter Caruana, Gibraltar's Chief Minister. The Government then said it would "consider how to proceed", insisting that negotiations with Madrid would be unaffected by the outcome.
But Whitehall sources said yesterday that the talks were "parked", with little or no prospect of resumption in the near future. Gibraltar has now fallen down the list of Foreign Office priorities, with no plans for a meeting on the subject between Jack Straw, the Foreign Secretary, and Ana Palacio, his Spanish counterpart.
Officials are blaming the impasse – which they believe might not be broken for years – on Madrid's refusal to show flexibility. They believe the referendum result underlines the need for Spain to soften its stance.
One source said Peter Hain, a former minister for Europe, had come "within an ace" last summer of producing firm proposals to present to Gibraltarians. But the move was vetoed at the last minute by José Maria Aznar, the Spanish Prime Minister.
The source said the Blair administration was the latest in a succession of governments that had attempted to tackle the issue of Gibraltar.
Denis MacShane, Mr Hain's replacement as Europe minister, met Mr Caruana last week, but the Foreign Office said it was simply a "get to know you meeting" and confirmed there were no further diplomatic meetings scheduled for the new year.
Madrid is refusing to accept that an agreement on sharing sovereignty would be permanent and is holding out for full access to the Gibraltar's military base.
Britain's commitment to put a deal to a referendum of Gibraltar's 30,000 residents – bitterly opposed by Spain – has emerged as the biggest sticking point in negotiations.
In comments that led to last month's referendum, Mr Straw told MPs in July that Britain and Spain had reached "broad agreement" to share sovereignty over the territory, adding that the two countries were "closer than ever before" to settling the 300-year-old dispute.
But what rapidly became clear was that the remaining sticking points between the two governments were proving impossible to resolve.
The Labour MP Eric Illsley, of the Commons Foreign Affairs Select Committee, said: "It is Spain that has scuppered the process." He said that if Madrid had accepted the idea of joint sovereignty, there could have been a firm proposals to present to Gibraltarians now.
Gibraltar has been British since it was captured from Spain in 1704. Spain formally ceded it in 1713, but has never given up trying to get it back.