Queen Sophia of Spain will not be attending Friday's Diamond Jubilee lunch after being ordered by her government to reject the invite.
The last minute snub was in response to a reported trip the Earl of Wessex will make to Gibraltar, a UK overseas territory which Spain wants returned to its sovereignty.
Earlier this year Spanish prime minister Mariano Rajoy raised Madrid's long-standing demand for the return of Gibraltar during talks with David Cameron.
But Mr Cameron told him that there was no change in the UK's position that the Mediterranean outpost should remain British.
Chief Minister of Gibraltar, Fabian Picardo said: "I think this is an 18th century response by Spain to a 21st century issue and I think it's a great pity that Queen Elizabeth II will not have all the monarchs from Europe around the table represented with her as we all joyiously celebrate the Diamond Jubilee."
The Foreign Office was also accused today of putting the Queen in the position of having to dine with despots as the row over a royal lunch with foreign monarchs intensified.
Denis MacShane, a former Foreign Office minister, criticised the guest list for apparently including the King of Bahrain, Hamad Al-Khalifa - whose regime brutally suppressed pro-democracy protests last year.
The Labour MP said many would regret Foreign Secretary William Hague's decision to approve the inclusion of the Middle East ruler.
Another controversial guest expected to attend is Swaziland's King Mswati III, who is accused of having a lavish lifestyle while his people starve.
Protests were held outside the African ruler's exclusive London hotel on Wednesday where he is said to be staying with an entourage of more than 30 people.
Buckingham Palace has not commented on the guest list for the Windsor Palace lunch, but the Royal Family have close links with many Middle East monarchs who are likely to attend and whose regimes have faced criticisms about human rights abuses.
Members of the British monarchy attending include the Duke and Duchess of Cambridge, Prince Harry, the Duke of York and Princesses Beatrice and Eugenie and the Earl and Countess of Wessex.