Britain is preparing to give full diplomatic status to the European Union’s ambassador to London.
The government rejected the bloc’s demands to formally recognise João Vale de Almeida as the first EU ambassador to London after Brexit, leading to tensions with Brussels.
No 10 has defended its decision, insisting the EU should be treated as an “international organisation” rather than a state.
This led to condemnation by the EU and Conservative MPs who called it “petty”.
Former US president Donald Trump reversed a similar downgrade to the EU’s ambassador to the US in 2019 after criticism.
Foreign Office sources have now told The Times that the decision has led to an “unhealthy chilling effect” on talks between diplomats on both sides in Brussels.
In retaliation to the move, Britain’s ambassador to Brussels was frozen out of negotiations, with sources adding that negotiations on key areas such as fishing and customs had been made more difficult.
A senior government source said talks were taking place with Brussels to formally recognise Mr Almeida.
“I think it will be resolved sooner rather than later. It is a silly dispute but has had a corrosive effect,” the source said.