It's not unusual for people not to want to belong to another country when they've been British for 300 years

Gibraltar's Chief Minister Peter Caruana

The meeting - marking the end of a hectic week of international diplomacy for the British prime minister - is seen as a preparatory step for negotiations to determine the final status of the territory, scheduled to begin in Barcelona in two weeks' time.

The bulk of the meeting was due to have been taken up by European Union issues, such as completion of the European single market during Spain's presidency in the first half of next year, and the war on terrorism will also have been discussed.

But Gibraltar, a British controlled territory with 30,000 inhabitants, is attracting most outside interest, particularly after its government reacted with fury at what it sees as attempts by the British to hand over control of the Rock to Spain without consultation of its inhabitants.

British 'obligation'

Gibraltarians' chief suspicion is that British sovereignty will be sacrificed by the UK, which is keen to resolve a dispute that has proved a constant embarrassment to both sides.

It is therefore boycotting the talks as Britain would not guarantee that Gibraltar would have the power to veto any outcome of the meeting it considered inappropriate.

The Rock: Central to Anglo-Spanish relations

Even as the two leaders met, Gibraltar's Chief Minister Peter Caruana was telling BBC Radio 4's World at One the idea that sovereignty could be handed around between the UK and Spain was "democratically obscene".

Earlier the UK Foreign Office minister Peter Hain decried the Gibraltar government's decision not to attend the meetings, saying that Britain had an "obligation" to resolve the dispute.

He also said that Gibraltarians would have a say in their future.

"The people will have a vote on their future and Spain understands that," he said.

Agreement demand

But Mr Caruana said: "Mr Hain expects the Gibraltar Government to go along to talks on the basis that we will be consulted, but that he and Spain will be free to agree whatever they choose over our heads.

"And we are saying, 'Yes, we will go to talks, but agreements require the agreement of all of us, and not just the two of you'."

Animosity between the two countries over Gibraltar has hampered the small territory in its development as a financial centre, with border delays, poor telecommunications and airport restrictions created as a result of Spain's anger over its status.

In addition, important agreements such as the so-called "Open Skies Pact," which frees up European air space, are being held up because of arguments about whether or not the Rock can be included.

Business seminar

Before Mr Aznar's arrival at Downing Street for lunch and talks, Mr Blair's official spokesman said the two leaders would be discussing their mutual support for economic reform and liberalisation, which are set to be discussed at the EU summit in Barcelona next spring.

Following their meeting, the pair hosted a seminar of businessmen to see what reforms would like to open up markets further and tackle skill shortages.

The military action against Afghanistan would also be on the agenda, the spokesman said.

"Spain are an important part of the coalition and have been resolute in what they have said in public and in their offers of support," he added.

Mr Blair's meeting with his Spanish counterpart follows talks earlier this week with Pakistan's President Pervez Musharraf and King Abdullah of Jordan, as well as President George Bush in Washington.