By Mike Donkin and Stuart Hughes BBC, Gibraltar

It was the best piece of bad news the people of Gibraltar had heard in a long time.

I sincerely believe nothing can now come of this. It is an historic fiasco - the talks are surely over

Sarah Abecasis Gibraltarian activist

The news that the UK and Spain could not agree means no change here for the foreseeable future. And, as word spread around the Rock, the relief was evident.

Outside the governor's residence on Main Street, a small group of activists had gathered to ask him to lobby harder against a deal.

In the event, they need not have worried. When the depth of disagreement was confirmed from Downing Street, they furled up their banner, retired to the Angry Friar Pub and ordered a large round of best bitter.

Local pressure

Charles Bruzon, a leader of the Voice of Gibraltar group, said the deadlock was great news, but hardly surprising.

"I think it is sad after so many sessions of talks, the outcome has been so ridiculously negative," he said.

The two leaders were unable to resolve their difference

"As far as we are concerned it is a success. We have been trying to tell the British Government that it is no use them making a deal over our heads, because sovereignty here is just not negotiable," he added.

Another activist, Sarah Abecasis, said Gibraltarians had derailed the Anglo-Spanish talks through their opposition.

"It will be extremely hard for them to carry on negotiating on this issue. I sincerely believe nothing can now come of this," she said.

"It is an historic fiasco - the talks are surely over," she added.

PR campaign

In government circles though caution still prevails.

Gibraltar had blitzed Spanish and English newspapers with full-page advertisements even before Prime Minister Jose Maria Aznar visited London. And, it says, the public relations campaign will not stop yet.

The Royal Regiment has defended the colony for 300 years

At the offices of the colony's own daily newspaper, The Chronicle, editor Dominique Searle explained:

"People here still feel in limbo. I think the Blair-Aznar meeting put the issue into the deep freeze for the moment. The two sides will be looking for space in the next few weeks, but they will then try to bring the issue back to the table," she said.

Back outside the governor's residence ,soldiers from the Royal Gibraltar Regiment stamped their shiny boots on the flagstones as they routinely changed the guard.

They have defended the Rock against all-comers for three centuries, but everyone here knows the siege is not over yet.

The enemy's tactics may be different now, Gibraltarians say, but the danger to their identity is just as real.