Peter Hain, Minister for Europe and later Secretary of State for Wales in Tony Blair's government, made the comments on the UK's BBC Radio 4 station.
Hain headed up talks on the Gibraltar issue while Tony Blair was in power.
During these discussions, the possibility of shared sovereignty for the territory was on the table, the MP said.
"There was a historic opportunity to have joint sovereignty which would have protected Gibraltarians' way of life — they could remain British citizens, but it also recognized Spain's historic claim at the root of this," he said.
Hain added the UK should enter into new talks with Spain on the matter.
"I think we need to revisit those whole negotiations."
He said the joint sovereignty would have meant open borders, aviation access and telephone access.
But UK papers said the idea was unlikely to be popular in Spain.
In a 2002 referendum, Gibraltarians voted overwhelming in favour of staying with the UK with only 1.03 percent of local opting for becoming part of Spain.
Relations between the territory popularly known as The Rock in English and El Peñon in Spain have been particularly fraught in recent times.
Last week, Gibraltarian authorities tipped 70 blocks of cement into shared waters allegedly in a bid to stop incursions by Spanish trawlers.
This in turn led to a roadblock by Spanish authorities operating at the border between both countries, which left hundreds of drivers stranded in unbearable heat for up to six hours.
The British government, which had already voiced "serious concerns" about the dispute, has vowed to carry out its "constitutional commitments" to the people of Gibraltar after two of the most turbulent weeks in Spain-Gibraltar relations in recent times.
On Monday, Gibraltar's chief minister, Fabian Picardo, said Madrid was behaving like North Korea.
The UK Prime Minister David Cameron, meanwhile, has stated he has "serious concerns" in the wake of recent events.
Gibraltar was ceded to the British Crown in 1713 but waters surrounding the territory is still disputed.