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The fortifications of Gibraltar were modernised and upgraded in the 1770s with the construction of new batteries, bastions and curtain walls. The driving force behind this programme was the highly experienced Colonel (later Major General) William Green, who was to play a key role a few years later as chief engineer of Gibraltar. He was joined in 1776 by Lieutenant General George Augustus Elliott, a veteran of earlier wars against France and Spain who took over the governorship of Gibraltar at a key moment.

Britain's successes in the Seven Years' War had left it with expensive commitments in the Americas that had to be paid for and had catalysed the formation of an anti-British coalition in Europe. The British Government's attempt to levy new taxes on the Thirteen Colonies of British America led to the outbreak of the American War of Independence in 1776. Seeing an opportunity to reverse their own territorial losses, France and Spain declared war on Britain and allied with the American revolutionaries.

In June 1779, Spain began the fourteenth and longest siege of Gibraltar, known as the Great Siege. The Spanish strategy combined a steady bombardment of Gibraltar from the land with seaborne attacks and attempts to cut off the supply lines to Morocco. The intense bombardments from land batteries, gunboats and specially constructed "floating batteries" reduced much of the town of Gibraltar to ruins. The lack of food led to starvation and outbreaks of scurvy and other diseases. The garrison nonetheless held on, repelling several major Spanish attacks and carrying out sorties against the besieging forces. It was reinforced and restocked by several British supply convoys that successfully broke through the Spanish blockade of the Straits. The siege dragged on for over three and a half years before peace was finally declared; Britain ceded West Florida, East Florida and Minorca to Spain but kept Gibraltar.

The Great Siege of Gibraltar lasted from 24 June 1779 – 7 February 1783 and remains one of the longest sieges endured by the British Armed Forces, as well as being one of the longest continuous sieges in history. A combined Spanish and French fleets blockaded Gibraltar from the sea, while on the land side an enormous army was engaged in constructing forts, redoubts, entrenchments, and batteries from which to attack Gibraltar. The Spanish committed increasing number of troops and ships to the siege, postponing the planned Invasion of England by the Armada of 1779. The first relief of the siege came in the spring of 1780 when Admiral George Rodney, captured a Spanish convoy off Cape Finesterre and defeated a Spanish fleet at the Battle of Cape St. Vincent, delivering reinforcements of 1,052 men and an abundance of supplies.

The British defenders continued to resist every attempt to capture Gibraltar by assault but supplies again began to run low. On 12 April 1781 Vice Admiral George Darby's squadron of 29 ships of the line escorting 100 store ships from England laden for Gibraltar entered the bay. The Spanish fleet was unable to intercept Darby's relief. The Spanish frustrated by this failure began a barrage of the town causing great panic and terror among the civilian population. Deliberate targeting of civilians was unprecedented at the time and was to continue for 2 years obliterating any architectural heritage from the Spanish period. Unable to starve the garrison out the French and Spanish attempted further attacks by land ans sea, the night before the Grand Attack on 27 November 1781, the British garrison filed silently out of their defence works and made a surprise sortie routing the besieging infantry in their trenches and postponed the grand assault on The Rock for some time.

On 13 September 1782 the Bourbon allies launched their great attack; 5190 fighting men both French and Spanish aboard ten of the newly engineered 'floating batteries' with 138 heavy guns, as well as 18 ships of the line, 40 Spanish gunboats and 20 bomb-vessels with a total of 30,000 sailors and marines. They were supported by 86 land guns and 35,000 Spanish and French troops (7,000 –8,000 French) on land intending to assault the fortifications once they had been demolished. The 138 guns opened fire from floating batteries in the Bay and the 86 guns on the land side, directed on the fortifications after weeks of preparatory artillery fire. But the garrison replied with red-hot shot to set fire to and sink the attacker's floating batteries and warships in the Bay. The British destroyed three of the floating batteries, which blew up as the 'red-hot shot' did its job. The other seven batteries were scuttled by the Spanish. In addition 719 men on board the ships (many of whom drowned) were casualties.

In Britain the Admiralty considered plans for a major relief of Gibraltar, opting to send a larger, but slower fleet, rather than a smaller faster one. In September 1782 a large fleet left Spithead under Richard Howe, arriving off Cape St Vincent on 9 October. The following evening a gale blew up, scattering the Spanish and French fleet allowing Howe to sail unopposed into Gibraltar. A total of 34 ships of the line escorted 31 transport ships which delivered supplies, food, and ammunition. The fleet also brought the 25th, 59th, and 97th regiments of foot bringing the total number of the garrison to over 7,000 Howe then sailed out and fought an indecisive battle with the combined allied fleet before withdrawing to Britain in line with his orders.

The siege was continued for some months longer, but in the spring of 1783 a preliminary peace agreement brought the cessation of hostilities. Finally, in February of 1783 the siege was lifted. The outcome of the Great Siege made it politically impossible for the British government to again consider trading away Gibraltar, even though King George III warned that it would be the source "of another war, or at least of a constant lurking enmity" and expressed his wish "if possible to be rid of Gibraltar ... I shall not think peace complete if we do not get rid of Gibraltar." General Eliott and the garrison were lauded for their heroism, and the tenacity of their defence of Gibraltar acquired, as one writer puts it, "a sort of cult status". The British public acquired "an emotional, albeit irrational, attachment to the place." The reputed impregnability of Gibraltar gave rise to the expression, which is still current today, of something being as "strong as the Rock of Gibraltar".