Spain told Britain on Tuesday it must remove 70 concrete blocks dropped into the waters off Gibraltar before Madrid will agree to dialogue in a heated dispute over the British outpost.

In an article in the Wall Street Journal, Foreign Minister Jose Manuel Garcia-Margallo sharply criticised Gibraltar's creation of the reef last month in disputed waters that were used by Spanish fishermen.

Spain is willing to restart a dialogue with Britain and it will accept the creation of ad-hoc forums that include Gibraltar and the neighbouring Spanish province Andalusia for issues relating to residents on both sides of the border, Garcia-Margallo said.

"But as Spanish Prime Minister Mariano Rajoy observed earlier month to his British counterpart David Cameron, it is first necessary for the UK to show that it intends to undo the damage that has already been caused, in particular by removing the concrete blocks."

The Gibraltar government says the concrete reef in the Bay of Gibraltar will regenerate marine life and argues that the Spanish raked for shellfish there illegally in its waters.

But Garcia-Margallo said Spain had "no doubt" about its sovereignty over the waters, arguing that they were never included in the 1713 Treaty of Utrecht under which Spain ceded Gibraltar to Britain in perpetuity.

"These waters and this land therefore have always remained under Spanish sovereignty," the foreign minister said.

Dropping the concrete blocks was a "violation of the most basic rules of environmental conservation," he said, adding that local fishermen who relied on the area for a quarter of their activity had been deprived of their livelihoods.

Spain stepped up checks at the border with Gibraltar this month saying it was cracking down on smuggling but creating hours-long traffic queues. Britain accuses Madrid of using the border to retaliate over the reef.

The European Commission is to send observers to the border next month at the invitation of both Madrid and London.

It is the latest in a string of diplomatic rows over the self-governing British overseas territory, which measures just 6.8 square kilometres (2.6 square miles) and is home to about 30,000 people.

Garcia-Margallo also protested against:

- The refuelling of ships in waters off Gibraltar, saying it risked releasing toxic discharges into the sea;

- Smuggling over the border from the low-tax territory. He said illegal cigarette seizures surged 213 percent between 2010 and 2012.

- The opacity of Gibraltar's tax regime. The minister said Gibraltar had 21,770 registered companies of which only 10 percent paid taxes and most had been formed by non-residents seeking to avoid taxes at home. Shell companies in Gibraltar concealed the true ownership of 3,000 properties in Spain, he said. And some 6,700 Gibraltarians lived in Spain while claiming tax residence in Gibraltar.

Garcia-Margallo urged Britain to re-open talks on sovereignty for Gibraltar, saying UN General Assembly resolutions established that the "colonial situation must end" through talks between London and Madrid.

Britain refuses to return sovereignty to Spain against the wishes of Gibraltarians, who are staunchly pro-British. But Garcia-Margallo said the UN did not recognise their right to self-determination, only calling for their interests to be taken into account.