Downing Street came within a day of doing a controversial deal to share the sovereignty of Gibraltar with Spain and end 300 years of conflict over "The Rock".

The Prime Minister Tony Blair and Foreign Secretary Jack Straw were both keen to do a deal over Gibraltar to "help our strategic relationship" with Spain, according to a new book.

But the then Europe minister Peter Hain reveals in his memoirs that secret talks with the Spanish government broke down at the last minute when the Spanish got "cold feet" over the agreement.

The book, Outside In, also reveals that the government was deeply concerned about "money laundering, tax evasion, drug trafficking and crime" associated with Gibraltar and had little sympathy for local politicians who insisted that the constitutional arrangements should not be altered.

"Jack's desire to do something about Gibraltar coincided with my gut instinct that it was ridiculous in the modern age for Britain to have a colony on the tip of Spain nearly 2,000 miles away," he writes.

He adds that Mr Blair told him: "It is really important to secure a better relationship with Spain and to remove it [Gibraltar] as an obstruction to our relations within Europe." He writes that Mr Blair was contemptuous of Gibraltarian attitudes and insistent upon making a deal that could move the whole situation forward.

Mr Hain says that despite the vehement opposition from Peter Caruana, the Chief Minister of Gibraltar, he went ahead with negotiations in Madrid. "To our astonishment, as the evening arrived, we realised we had a full agreement... and accepted co-sovereignty could not open the door to full Spanish sovereignty."

But talks then foundered and no further progress on the issue has been made subsequently.