Fabian Picardo’s office is surrounded by guns. In the courtyard sits a huge black cannon, while the entrance is protected by two more gold plated monsters, glinting in the sun.

But the newly-elected Chief Minister of Gibraltar hopes that he will find a peaceful way of protecting the Rock – despite an escalation in the war of words with Madrid.

“We are always hopeful that Spain will follow us into the 21st Century and drop its claim on our land,” said Mr Picardo, in his first interview with a British newspaper since winning the December election.

“The Spanish government are playing to their constituency of support and concentrating more on the theory of their claim, rather than the realities on the ground. And that is a tragedy for people of both sides of the frontier.”

If Mr Picardo, 39, was expecting a gentle introduction to the 300-year-old tussle over the sovereignty of Gibraltar, then he has had a brusque awakening. Just as the newly re-elected Cristina Kirchner in Argentina has made a diplomatic push against British “colonisation” of the Falkland Islands a key policy of her government, Spain’s ruling Partido Popular (PP) – itself freshly in power, following the November general elections – has been pushing sovereignty over Gibraltar up the agenda.

Mariano Rajoy, the Spanish prime minister, has abandoned the tripartite talks over areas of co-operation between Spain, Britain and Gibraltar. Instead, on Wednesday, Madrid formally asked Britain for bilateral talks over the sovereignty of Gibraltar – much to the fury of the excluded overseas territory’s residents.

“They want to turn me into a Spaniard, but not one part of me is Spanish,” said Martin Pickford, a small businessman, as he drove through the winding streets in the shadow of the Rock.

“My ancestors were from Malta. Many more are descended from Genoese merchants or Italian sailors. No one here wants to be suddenly told they are Spanish.”

The publication of former Europe minister Peter Hain’s memoirs last month, in which he told how Tony Blair came close to agreeing joint Spanish-British sovereignty, has further raised hackles in Gibraltar. The territory was ceded to Britain under the Treaty of Utrecht in 1713, and has been resolutely British ever since.

Spain’s foreign minister, José Manuel García-Margallo, last month sparked alarm in Gibraltar when he greeted a British MEP friend with the age-old rallying cry: “Gibraltar: Spanish!” and he has further pressed the issue by writing to William Hague to demand clarification on Britain’s stance.

Mr Rajoy is set to meet David Cameron in London at the end of this month, but the authorities in Gibraltar are trusting that the British prime minister will defend their interests.

Yet Mr Picardo knows that he must remain on his guard. And inside his office just off Gibraltar’s Main Street, the Oxford-educated lawyer told The Sunday Telegraph that he is determined his government will not be intimidated by sabre-rattling from Madrid.

“We are seeing what appears to be a more proactive desire by Spain to raise the sovereignty issue,” he said, criticising Madrid’s decision to cease tripatrite talks.

“The Spanish government does not best serve the interests of its people, especially those in the local area, by snubbing an international agreement to which it has subscribed in principle.

“And with five million or so people unemployed, it seems to me the Spanish have other more important priorities than historic claims over my people.”

Certainly the dire economic situation across the border, with the highest unemployment in the eurozone – one in two young people have no job – has renewed focus on Spain’s booming British neighbour.

New luxury developments are still springing up alongside the sparkling marinas, and the Lord Nelson pub and Marks and Spencers are doing a roaring trade.

Growth this year is expected to be comfortably over four per cent, and the colony’s 30,000 inhabitants enjoy almost full employment. Gibraltar makes its money through offshore finance, tourism, its port and online gaming – and an enticingly low corporate tax rate of 10 per cent has brought businesses flocking to their shores.

“We believe we can attract the sort of investors that the rest of Europe would be welcoming with open arms,” said Mr Picardo.

“You have to remember the scale of the economy here. Gibraltar has a GDP of just over £1 billion. A £100m investment here goes a long way, whereas a £100m investment in Greece, Spain or the UK for instance is a drop in a drop in an ocean.

“So the highs and lows of the Spanish economy might not affect the bottom line as it could do, given our physical proximity.”

Across the border, in the windswept Spanish town of La Linea, residents gaze wistfully at their thriving neighbour.

“Just look at it. It is obviously part of Spain, and it’s crazy that it isn’t accepted as such,” said Pepe, 60, a retired hotelier, who did not want to give his surname. “I think it’s absolutely right that Mariano Rajoy speaks to Britain about the issue.”

His friend Paco, 65, added: “What hurts me most is that they are laughing at us from across there. During the World Cup they even supported Germany instead of Spain! It’s not right.”

In the pretty Andalusian plaza in the centre of town, others complain that Gibraltarians use the low-tax business regime to secure deals on mainland Spain. Smuggling of cheap Gibraltarian tobacco into Spain is also a problem.

“I am Spanish and I defend Spain, but they insult it,” said Inmaculada Floria, 36, warming her hands on a coffee beneath a sculpture of flamenco dancers. Like 7,000 other Spaniards, until recently she crossed the border daily to work in Gibraltar.

“The people there are really scared of the PP – they associate the party with Franco, who blockaded Gibraltar for 13 years. They should be talking about ways of improving co-operation, not just saying ‘No, no, no’.”

Her husband Tomas Rodriguez, 39, a civil servant, said: “It’s true that a lot of Spaniards aren’t interested in Gibraltar. But here it affects us directly. For instance, a coffee in La Linea costs the same as in Madrid, and we are pushed out of the property market. It needs to be sorted out.”

But those within Gibraltar’s ancient fortress walls argue that the territory actually does a huge amount to help the local area. A study by the Chamber of Commerce found that almost 20 per cent of all jobs in the Campo de Gibraltar area – from Tarifa in the west almost up to Estepona in the east – were provided by Gibraltar.

Furthermore, Spanish workers in Gibraltar earned £43m in 2007 – the most recent data available – which would be repatriated to Spain, while Gibraltar businesses imported £174m worth of goods from Spain.

“Gibraltar and Spain have a symbiotic relationship and we can do a lot more to work together,” said Edward Macquisten, chief executive of the Chamber of Commerce.

“But if Madrid continues to clamp down, then it won’t help anybody.”

Beneath Mr Macquisten’s office, Roy’s Cod Plaice is doing a brisk trade. “Last year was the best I’ve had in 24 years here,” said Roy Walker, 62, the owner. “Life is good here; the economy is good, weather is lovely, and there is very little crime.

“But there is constant hostility from the Spanish authorities, from the head of the government all the way down. Not from the people, but from their government.

“I live in Spain and come here every day, as do all my workers. The border queues are sometime two hours – why can’t it just be open like with Portugal or France? But I’m pleased David Cameron is standing up for us and saying sovereignty is our decision. And we want to stay as we are.”

It is a view shared by 98 per cent of Gibraltarians, who in a 2002 referendum voted resoundingly to maintain the status quo.

And it is something that Mr Picardo is determined to defend.

Is the cannon outside his office pointing in the direction of Spain, I ask?

“It’s pointing in the direction of the governor’s residence opposite – at the representative of the British Foreign Office!” he laughed. “But that is totally unintentional as in any event it is decorative. We are confident in our position here.

“Gibraltar’s arsenal is intellectual.”