Papers setting out the EU's Brexit talks strategy say that the region will only be included in a post-Brexit trade deal if Spain agrees with the terms.
It hands Spain, which has long held ambitions to reclaim sovereignty of the territory, significant power over Gibraltar's future. While Gibraltar voted overwhelmingly against quitting the European Union, it now faces the possibility of losing access to both a source of thousands of workers who cross its border daily and a market for its financial services industry.
He said: "Confirmation that Gibraltar's future must be agreed by the United Kingdom and Spain shows just how damaging the Government's hard Brexit will be on this strategically important British territory".
The ongoing geopolitical divorce between the United Kingdom and the European Union now has its first custody battle.
Gibraltar rejected the idea of Britain sharing sovereignty with Spain by 99 percent to 1 percent in a 2002 referendum, but voted overwhelmingly to remain part of the European Union in last June's Brexit vote.
Picardo said the European Union guidelines would complicate Brexit talks even further but vowed that they will inflict no change to Gibraltar's "continued, exclusive British sovereignty".
Picardo said he hoped that the trade deals Britain hopes to negotiate with other countries around the world, including the United States, will also benefit Gibraltar.
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In 2002 a referendum which would have given Spain and Britain shared control of the region was rejected by nearly 99% of the population.
Brake has also urged Theresa May to act and protect the people of Gibraltar.
Gibraltar is an island off the southern coast of Spain with a population of around 30,000.
"Theresa May must urgently produce a plan that protects the citizens of Gibraltar, including their businesses and communities".
But even in their draft form, Chief Minister Fabian Picardo said the move was discriminatory and "unnecessary, unjustified and unacceptable", adding that this was a "predictable machination" and part of the reason why Gibraltar had overwhelmingly backed Remain.
Andrew Rosindell of the All-Party Parliamentary Group For Gibraltar said "an agreement without including Gibraltar means there can be no agreement".
"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 said.