The European Union is to send a “fact- finding mission” to Gibraltar to investigate border checks imposed on the Spanish side in an attempt to defuse the escalating diplomatic crisis between Britain and Spain.

EU observers will move in to try and ease tensions between the two countries over extra checks which have led to lengthy traffic delays. Britain says the checks break EU free movement rules, but Spain says Gibraltar is not controlling smuggling adequately.

The intervention was announced hours after three Royal Navy ships, led by the frigate HMS Westminster, arrived at the British Overseas Territory for a routine stopover in a move widely interpreted as a show of strength.

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Downing Street has declined to rule out the use of retaliatory political action against Spain if the dispute is not resolved quickly.

Locals waving Union flags gathered on the quayside to watch the ship come in. Andrea Jones, 46, who has lived in Gibraltar for 12 years, said the frigate’s arrival was “a two-fingered salute towards Spain”.

On Friday, David Cameron called José Manuel Barroso, the president of the EU Commission, to raise “serious concerns” over the delays at the border and to urge a monitoring group to be dispatched to the area.

Today EU officials announced that a telephone conversation between Mr Barroso and the Spanish Prime Minister Mariano Rajoy had resulted in Spain allowing an EU observation team in “as soon as possible”.

A statement from Brussels said: “They agreed that a Commission fact-finding mission should as soon as possible examine in loco the border control/movement of people and goods questions.

“President Barroso expressed his hope that Spain and the UK will address these matters in a way that is in line with their common membership in the EU.”

It is the latest incident in a diplomatic dispute that was reignited last month after Gibraltar authorities sunk 70 concrete blocks into its waters, which it said were positioned to prevent fishing in the area to boost stocks. The move provoked fury from Spanish fishermen. Since the artificial reef was created, Spain has imposed stringent checks to traffic crossing the border in a move that Downing Street has described as “disproportionate and politically motivated”.

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Spain insists the checks are essential in its fight against tobacco smuggling and money laundering and has pledged to use all legal means necessary to protect its national interests.

In recent months, the country’s centre-right government has taken a harder line regarding its claim on the British Overseas Territory, while Downing Street has made clear that it will not negotiate over sovereignty as long as Gibraltar’s citizens want to remain British.

It comes amid wider reports that UK officials are examining the potential to disrupt Spain’s lucrative tourist industry as well as blocking its policy initiatives at the EU.

A Number 10 spokesman told reporters: “Our preference here is to resolve this via political means and through dialogue with the Spanish government. We clearly want to reach a quick resolution which is acceptable and brings an end to these totally disproportionate border checks.”

Asked if Mr Cameron was confident of securing a swift resolution, he said: “We will do what we need to do to bring this to a satisfactory conclusion.”

A Gibraltar government spokesman said it welcomed the intervention of the EU: “As far as we are concerned we feel that they (the border checks) are over the top and the British Government has said exactly the same.”