Mauritius has rejected the terms of the deal to hand over the Chagos Islands in a major blow to Sir Keir Starmer.
Navinchandra Ramgoolam, the country’s new prime minister, told MPs that the agreement was not good enough and must be renegotiated.
In a statement to the Mauritian parliament, he said it “would not produce the benefits that the nation could expect from such an agreement”.
His announcement will come as a major embarrassment to Sir Keir, who made striking the deal one of his first major foreign policy moves.
Mr Ramgoolam was elected as the new leader of Mauritius last month, replacing Pravind Jugnauth, who had brokered the deal with No 10. One of his first acts in power was to order a review of the draft agreement, which had been rushed through ahead of the nation’s general election.
In his statement on Tuesday, Mr Ramgoolam said the review, carried out by legal advisers, had recommended renegotiating the deal. He told MPs that he had relayed that message to Jonathan Powell, the UK’s national security adviser, during a meeting last week.
Mr Ramgoolam said: “Mauritius made clear that while it is still [our] belief to conclude an agreement with the UK, the draft agreement that was shown to us after the general election is one which, in our view, would not produce the benefits that the nation could expect from such an agreement.
“Mauritius therefore accordingly submitted counter-proposals to the UK so that an agreement which is in the best interests of Mauritius can be concluded.
“The response of the UK to our counter-proposal was received yesterday afternoon, and is now currently being considered.”
Downing Street said that Sir Keir’s position on the deal “hasn’t changed” and denied suggestions that it was “unravelling”.
The Prime Minister’s spokesman said: “The Government inherited a situation where the long-term secure operation of the military base at Diego Garcia was under threat, with contested sovereignty and legal challenges.
“The agreement we’ve struck with Mauritius protects the long-term secure operation of the UK-US base which plays such a crucial role in regional and international security.
“There’s obviously been a change of leadership in Mauritius and we’ve been engaging with the new administration on the details of the deal and we remain confident the agreement is in both sides’ shared interest.”
Asked whether the deal was unravelling, he replied: “I wouldn’t characterise it like that at all.”
No 10 also did not shut down suggestions that the UK could offer Mauritius more money as part of a push to get the agreement over the line.
Asked if Britain would send the island nation more cash, the spokesman responded: “I’m obviously not going to get into the details of private conversations.”
The announcement adds to growing expectations that the agreement is likely to collapse following the election of Donald Trump. The US president-elect strongly opposes the deal because of the impact it would have on the US air base on Diego Garcia.
There have been concerns that Mauritius, a trade ally of China, could allow Beijing to snoop on the strategically vital airfield.
The proposed agreement would end 200 years of British rule in the Chagos Islands, a remote archipelago in the Indian Ocean. It would hand the tiny atoll to Mauritius, which is 1,400 miles away and has never had sovereignty over the territory before.
Diego Garcia is the most important of the islands involved because it hosts a regionally significant American air base. US jets operated out of the Indian Ocean base during the wars in Afghanistan and Iraq.
Nigel Farage, the Reform UK leader, is among those who have been advising Mr Trump about the deal.
