By Elisabeth O'Leary
Madrid - Spain has reached an agreement with Morocco over the disputed North African islet of Perejil, a senior government source said on Saturday.
The source declined to give further details, saying an official communique would be issued shortly but in Washington, the US State Department confirmed that the two countries had resolved their dispute.
The deal comes after intense telephone negotiations between the two sides, brokered by the United States.
Morocco claims sovereignty over Perejil and sent troops there last week only to be ousted without a shot being fired by Spanish troops, who remain, for the moment, on the island.
"The two sides have agreed to restore the situation regarding the island that existed prior to July 2002," US Secretary of State Colin Powell said in a statement.
"We believe this understanding is in the interests of both countries, and can serve as the basis for further steps in improving their bilateral relations," he said.
Both countries were keen to bury the embarrassing dispute before a high-profile meeting of European Union foreign ministers on Monday.
But despite increased activity on the islet itself, where photographers witnessed what appeared to be a cleaning up operation, Madrid said earlier on Saturday that no order to withdraw its forces had been given.
Earlier on Saturday Morocco was still insisting there could be no agreement until Spain withdrew its troops.
Madrid wanted a formal guarantee Morocco would not reoccupy the island once Spanish troops leave.
Spanish Foreign Minister Ana Palacio had not spoken directly with her Moroccan counterpart Mohamed Benaissa earlier in the day, but it is not known whether they were in contact later.
International efforts to broker a peace between the two countries were spearheaded by Powell, who has spoken to King Mohammed of Morocco and to the Spanish foreign minister several times in the last 24 hours.
Washington had sought a solution which would restore the peaceful, unoccupied status quo as it was on July 10, before Moroccan troops landed on the island. That was also Spain's stated aim.
Spanish media welcomed Powell's intervention as the situation had looked increasingly like moving towards deadlock.
"Washington has dedicated itself totally to resolving this absurd dispute, as the last thing it wants is a conflict between two of its allies on this side of the Mediterranean when the east flank is erupting amid widespread tension between the Muslim world and the West in the wake of September 11," left-leaning daily El Pais said in an editorial comment.
On the Moroccan coast several hundred people kept a watch on the tiny uninhabited outcrop just 200 metres away.
A young man managed to use a dinghy to land on the island with a Moroccan flag, only to be immediately escorted off again by the Civil Guard.
Spain's military presence in the Canary Islands, off west Africa, has been stepped up in recent days in the wake of the crisis over the islet, which Morocco calls Leila.
Although the two countries' proximity and trade ties mean they are key partners, the dispute is the latest in a long series. They have squabbled over immigration, fishing rights, oil exploration and the future of the Western Sahara.
Many political commentators understand Morocco's occupation of the island as a bid to start discussions on the thorny subject of Spain's North African enclaves of Ceuta and Melilla.
On Friday Benaissa acknowledged as much, saying Spain's withdrawal should be a prelude to talks on other issues, including Ceuta, 6km from Perejil, and Melilla.
Palacio said earlier this week that Spain had no intention of entering a joint sovereignty agreement on Perejil and that Ceuta and Melilla were not up for discussion.
Morocco may have been encouraged by current negotiations between Spain and Britain over the sovereignty of the British colony of Gibraltar, to which Spain also has claims.
(Additional reporting by Souhail Karam in Rabat)