The EU guideline effectively forces talks over Gibraltar in which Spain will have an upper hand, allowing its government to bring back to the negotiation table the dispute over the encalve's sovereignty, which it ceded to Britain in 1713.
Spain has a long-standing territorial claim on British Overseas Territory Gibraltar, held by the United Kingdom since 1713, which now houses key British army bases. Citizens of the rock - who overwhelmingly reject Spanish rule - will be concerned that the European Union apparently wants to allow Spain to sign off on the Brexit arrangements that concern them.
In a major diplomatic victory for Madrid, the EU's draft guidelines for Brexit talks with Britain state that any divorce deal that applies to Gibraltar will require the approval of both the United Kingdom and Spanish governments.
Shadow foreign secretary Emily Thornberry said: "The issue of Gibraltar is clearly a hard and thorny issue, but the truth is the people of Gibraltar want to remain British and they should do".
Spain has sought to increase its influence over Gibraltar and the idea of Britain and Spain sharing sovereignty has been rejected at the ballot box.
But in singling out Gibraltar, the Council appears to be siding with Spain's argument that Gibraltar is a bilateral matter for the United Kingdom and Spain, despite the British Government's insistence that the Rock's future is part of the wider negotiations.
Nearly 96 percent of Gibraltarians chose to remain in the European Union in last year's Brexit referendum, but British voters overall chose to leave the bloc. The region's chief minister said the proposal was "a clear manifestation of the predictably predatory attitude" Spain holds toward the territory.
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"The whole world and the whole European Union should know: this changes nothing in respect of our continued, exclusive British sovereignty", he said.
"We have been firm in our commitment never to enter arrangements under which the people of Gibraltar would pass under the sovereignty of another state against their wishes, nor to enter into a process of sovereignty negotiations with which Gibraltar is not content", she told parliament.
The Gibraltar question remains a fractious one for the U.K. -Spain relationship.
Mr Picardo said he had spoken to Foreign Secretary Boris Johnson, who he described as "implacable" in the defence of the rights of Gibraltar.
And on Wednesday, British Prime Minister Theresa May pledged her support for Gibraltar.
Liberal Democrat foreign affairs spokesman Tom Brake said: "Theresa May must urgently produce a plan that protects the citizens of Gibraltar, including their businesses and communities".
The Tory chairman of the all-party parliamentary group on Gibraltar, Jack Lopresti, accused Spain of using Brexit as "a fig leaf for trouble-making over the status of Gibraltar".