By Barnaby Mason BBC diplomatic correspondent

When UK Prime Minister Tony Blair meets his Spanish counterpart, Jose Maria Aznar, he will face a key decision - whether it is worth continuing with the negotiations on the future of Gibraltar.

Gibraltar is not the purpose of the meeting on Monday, but it has climbed up the agenda because of major difficulties in the talks.

Britain and Spain have been trying to reach agreement for nearly 10 months on sharing sovereignty over Gibraltar - the Rock, as it is called, at the southern tip of Spain which has been a British colony for nearly 300 years.

The two sides set themselves a rough deadline of this summer, now fast approaching, to do a deal - a political declaration of principles. Now, clearly, the crunch point has arrived.

Jack Straw was given a hostile reception

That does not mean a decision will be announced or even taken at the London meeting. But the two leaders will take stock of the three key problems and try to see a way through.

As one well-placed British source put it: "The Spaniards have some positions that we simply can't accept."

The first difficulty is the binding nature and duration of any deal. The British Government wants a permanent agreement, a definitive end to the historic dispute over Gibraltar.

Perhaps the word "permanent" need not appear in the document, but it must be absolutely crystal-clear that is what it means. Another British way of putting it is that an agreement on joint sovereignty must not be a slippery slope to total Spanish sovereignty.

Nato option

The trouble is, Spain undoubtedly sees the deal as a stepping-stone (rather than a slippery slope) to that ultimate ambition, which everyone knows it is not going to renounce formally. The most the British would accept, it seems, is a reference to the historic Spanish aspiration to recover Gibraltar.

The second problem is the future of the British military base on the Rock. Britain insists on keeping full operational control of the base, which it says is of key strategic importance.

Spain has talked of sharing control, perhaps through Nato. In reply, the British source said they could not allow a Spanish finger in the pie.

But the Nato angle is significant. At the moment, Spain does not allow non-British ships to use the military base. If there was a deal of the kind Britain is thinking of, Gibraltar would become a Nato base, not an exclusively British one.

Referendum

The United States is in favour of that, and it would also bring economic benefits to local people.

The people of Gibraltar are central to the third key problem in the negotiations - consent.

Under the constitution drawn up for the territory in 1969, the British Government promised it would never allow them to "pass under the sovereignty of another state against their freely and democratically expressed wishes".

Many Gibraltarians feel betrayed by Britain's plans

The specific promise now is that the 30,000 Gibraltarians will have the final say on implementing any agreement with Spain in a referendum.

The Spanish Government has apparently argued that the referendum should not cover the principle of joint sovereignty itself - an idea the British side now describes as nonsense.

On the other hand, the senior British source said the Spaniards were not being unreasonable in refusing to concede any principle of self-determination that would set a precedent for the Basque minority of northern Spain. That was a real problem for them.

It is a classic diplomatic puzzle. How to present the referendum in a way that enables Madrid to argue that it is not self-determination, only a consultation exercise.

The Gibraltar Government, which is not taking part in the negotiations, is enraged by all this.

Bound by treaty

It has repeated its long-held position to a United Nations committee that the UN Charter gives the people of the territory an unqualified right to self-determination - a right that cannot be overridden by treaties or other international agreements.

Britain maintains that it is bound by the Treaty of Utrecht of 1713, under which Spain ceded Gibraltar to Britain in perpetuity but which stipulates that if Britain ever withdraws, Spain should have the right to resume sovereignty.

Whatever view you accept, the attitude of the Gibraltarians is crucial and so far they are bitterly hostile to the proposed deal.

When the UK Foreign Secretary, Jack Straw, went to Gibraltar, he was booed by demonstrators shouting "traitor" and "Judas".

For its part, the Spanish Government has made little effort to win over the people there.

Mr Aznar has warned them that maintaining the status quo would damage their interests - the failure of the deal, he said, meant that Spain would continue to limit the use of Gibraltar airport, the development of the territory and his government's relations with Britain.

An agreement between Britain and Spain still cannot be ruled out. But an authoritative British view is that there is a real danger of the negotiations collapsing.

If that happens, the lesson may be that both sides deluded themselves into believing that their respective red lines or sticking points could be reconciled.