"The Commission has not found evidence to conclude that the checks on persons and goods as operated by the Spanish authorities at the crossing point of La Linea de la Conception have infringed the relevant provisions of Union law," a European Commission statement said.
Brussels said its findings were based both on its observations during a technical visit on September 25th and on information provided by both sides.
But the Commission said "the management of this crossing point is nevertheless challenging, in view of the heavy traffic volumes in a relatively confined space and the increase in tobacco smuggling into Spain."
In a letter sent to Spain on Friday, the EU recommended improving the crossing by adding lanes, decreasing random checks in favour of more targeted controls and exchanging data on smuggling with Britain.
A letter sent to Britain the same day also recommended improved measures to fight smuggling as well as the exchange of intelligence with Spain and more risk-based profiling of travellers crossing the border.
The Commission said it would review the situation in six months.
In London, a Foreign Office spokesman told AFP that Britain welcomed Brussels' recommendation that the Spanish government "should take measures to ensure that the Gibraltar-Spain border functions efficiently."
British EU inspectors were sent to assess customs controls at Gibraltar's border with Spain after a fresh row during the summer.
Tension flared in July when Gibraltar boats dumped blocks of concrete in disputed waters used by Spanish fishermen.
Gibraltar said it was creating an artificial reef that would boost fish populations and Spain complained the blocks threaten the livelihoods of Spanish fishermen.
Spain also blamed Gibraltar for an increase in tobacco smuggling to the Spanish mainland.
Madrid subsequently stepped up border checks, leading to huge queues for motorists, in what Britain and Gibraltar charged were a retaliatory measure aimed at choking the territory's economy.
Spain ceded Gibraltar to Britain in 1713 but has long argued that it should be returned to Spanish sovereignty. London says it will not do so against the wishes of Gibraltarians, who are staunchly pro-British.