Spain has been cleared by the European Commission of accusations the government broke EU rules by stepping up checks on people passing between the Spanish and Gibraltar border.
The move by the Spanish government to increase checks was regarded in Whitehall as politically motivated, a tit-for-tat response following the creation of an artificial reef by Gibraltar, which reportedly affected Spanish fisherman.
Madrid insisted that the checks were a response to tobacco smuggling, with the Commission's report, published on Friday, finding that Spain had not infringed EU rules by increasing checks.
A UK government spokesperson said London was disappointed with the report's conclusions, reiterating that the "action Spain has taken is illegal," yet welcomed its recommendation that border checks are more targeted in the future.
Long queues form at the border between Gibraltar and Spain
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The report also recommends the UK Government take action to ensure "non-systematic checks" on travellers and their belongings leaving Gibraltar, based on risk-analysis, as well as developing "exchange of intelligence on tobacco smuggling" with Spain.
The report gives both sides six months to respond to the recommendations, and Brussels "reserves the right" to revise its view on the legality of Spanish action and "pay another visit" to the Spain-Gibraltar crossing point if necessary.
The commission said on Friday it had received many complaints about delays of up to eight hours at the Gibraltar frontier caused by Spain's strict checking system - imposed, the UK Government believes, as direct retaliation for the creation of the artificial reef made up of 74 concrete blocks dropped into the sea in disputed waters.
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The UK says the move was intended to improve the sea life environment. Spain claims it was part of longstanding tensions between the UK and Spain over fishing rights.
Giles Chichester, Ashley Fox and Julie Girling, Conservative MEPs for the South West of England and Gibraltar, described the findings as "deeply disappointing and questionable". "It seems likely that Spain has effectively behaved itself for the time the inspectors were there. This is not surprising...the law rarely gets broken when the police are around," they said.
"Of course the conclusion is deeply disappointing and we do not believe that this questionable report reflects adequately what has happened there. In effect, this inspection has failed. We now insist that the Commission must continue monitoring what happens at this crossing, but in future we believe the inspectors should work discreetly and unannounced."
The MEPs described the management of the border crossing between Spain and Gibraltar as "challenging, in view of the heavy traffic volumes in a relatively confined space and the increase in tobacco smuggling into Spain".