Gibraltar will become part of the Schengen zone to ensure fluidity on its border with Spain in a landmark deal inked just hours before the Brexit deadline, Spain's top diplomat said Thursday. 

"We have reached an initial agreement with the United Kingdom which will serve as the foundation for a future treaty between the European Union and the United Kingdom concerning Gibraltar," Foreign Minister Arancha Gonzalez Laya told reporters in Madrid. 

"With this (agreement), the fence is removed, Schengen is applied to Gibraltar... it allows for the lifting of controls between Gibraltar and Spain," she said in an announcement just hours before the Brexit transition period ends at 2300 GMT. 

Although Britain reached a last-minute exit deal with the European Union on Christmas Eve, it does not cover Gibraltar, a tiny British territory on Spain's southern tip which is historically claimed by Madrid.

Negotiators representing the governments in Madrid, London and Gibraltar have been working around the clock to ink a deal to avoid the creation of a new "hard border" between Britain and the EU that would cause huge disruption for travellers and businesses on both sides of the line. 

With a land area of just 6.8-square kilometres (2.6-square miles), Gibraltar is entirely dependent on imports to supply its 34,000 residents, and without an accord, the movement of goods across the border from Spain would have been slowed by new customs procedures.

A desire to keep things flowing smoothly at the border explains why in 2016 nearly 96 percent of voters in Gibraltar backed staying in the EU, while in Britain proper the referendum vote was 52-48 percent in favour of leaving the bloc.