Pursuing a centuries-old dream, Britain and France today announced their agreement to construct the world's longest underwater tunnel to provide the first fixed link between the island kingdom and the continent of Europe.

The $6.6 billion rail-only project was unveiled at a joint press conference here by French President Francois Mitterrand and British Prime Minister Margaret Thatcher. It was chosen in preference to three rival plans that combined road and rail links across the 21-mile stretch of water known as the English Channel to the British and La Manche (sleeve) to the French.

In a room bedecked with the French Tricolor and the British Union Jack, both leaders hailed the future tunnel as a symbol of a new era of friendship between two nations that once considered themselves hereditary enemies.

"This is a great day. The prospect of a link between France and Great Britain has been talked about for centuries. Napoleon and Winston Churchill both spoke of it," said Thatcher, who read part of her prepared statement in French. "This is symbolic of the fact that the United Kingdom is a part of Europe."

Mitterrand, hailing what he depicted as "the biggest civil engineering project of the 20th century," said the privately financed, twin-bore tunnel would represent a "geographic, political, and economic" link between France and Britain.

The cross-channel project, which will halve the rail travel time between London and Paris to slightly more than three hours, contains potential political advantages for both leaders. It is expected to take seven years to complete and to generate about 40,000 jobs at a time of high unemployment.

Mitterrand, whose ruling Socialist Party faces crucial parliamentary elections in less than two months, stressed the economic boost that the tunnel is likely to provide to the Lille region of northern France, which has been particularly hard hit by the decline of the steel and coal industries. A traditional left-wing stronghold, this grimy industrial town is the political fiefdom of former Socialist prime minister Pierre Mauroy.

As far as Thatcher is concerned, advocacy of the tunnel project represents an effective reply to political opponents on both sides of the channel who have questioned the sincerity of her commitment to Europe. The British prime minister was described by Mauroy, speaking in his capacity as mayor of Lille, as a "messenger of a new Entente Cordiale" between France and Great Britain.

A joint communique said that the two governments had selected a private Anglo-French consortium, the Channel Tunnel Group-France Manche, to assume technical and financial responsibility for constructing the cross-channel link. The plan for two single-track, 31-mile tunnels between the British village of Cheriton and the French village of Frethun was the simplest and cheapest of the four projects submitted. Work will begin next year.

The only longer tunnel is being built in Japan to connect Hokkaido and Honshu islands. Of its 33 1/2 miles, 14 1/2 are under water.

Thirty-two banks already have pledged more than $5 billion of the estimated cost, according to consortium officials.

In separate statements, the two political leaders said they hoped work would begin on a supplementary road link between Britain and France by the year 2000. According to Mitterrand, the contract stipulates that the road project will be opened to other bidders if the Channel Tunnel Group fails to produce a satisfactory plan by that date.

The project adopted today is the latest in a series of dozens of different schemes for a fixed link between Britain and France -- including two false starts in 1875 and 1974 when drilling operations actually were begun and later abandoned. The first known cross-channel project dates back to 1753 when a French engineer, Nicolas Desmeret, suggested a tunnel as a means of "bringing Great Britain out of its splendid isolation."

In 1802, Napoleon's engineers put forward a more detailed proposal that consisted of two 10-mile sections meeting in an artificial island in the middle of the channel. The project, which was dropped the following year when France and England went to war, included plans for a paved roadway, lighting by oil lamp, and ventilation shafts protruding above the water.

Proposals for a fixed cross-channel link have posed questions of national identity for Britain, which traditionally has been conscious of its island status. But in France the issue is secondary. One of the most powerful British arguments against a tunnel until well after World War II was the fear that it could become a possible invasion route from the continent.

British attitudes to the tunnel idea have varied from the enthusiastic endorsement of Queen Victoria, who suffered from sea sickness, to the horrified reaction of her prime minister, Lord Palmerston, who condemned an attempt "to shorten a distance which we already find too short."

The verbal sparring between the British and the French flared up again briefly earlier this month when a French pop star, Renaud Sechan, produced an anti-Thatcher video. Entitled "Miss Maggie," the song included such lines as: "If I stay on earth, I will become a dog -- with Mrs. Thatcher as my lamp post."

The popular British press replied with ditties of its own advising the prime minister to cancel her meeting today with Mitterrand. "Mrs. Thatcher regrets, she's not coming to France again, Francois, She is sorry to have been so plain, But why don't you jump in the Seine, Francois," went one effort from the London Daily Mirror.

The Paris newspaper Le Monde summed up the love-hate relationship between France and Britain in a weekend supplement on the Channel tunnel project headlined "Dear and Detestable Entente."

Despite the caricatures that exist on both sides -- the French are known as "frogs" by the English who are themselves nicknamed the "rosbeef" over here -- the two nations have cooperated on many important projects. Among the most notable: the supersonic Concorde airliner, the Ariane space shuttle program, the European Airbus and now the channel tunnel.

Partners in the Channel Tunnel Group-France Manche include two major British banks, Midland and National Westminster, and three French banks, Credit Lyonnais, Banque Nationale de Paris, and Banque Indosuez. The British chairman is Nicholas Henderson, former British ambassador to Paris and Washington.

Thatcher was reported initially to have opposed the tunnel project on the grounds that it did not include a direct road link. She is said to have been concerned that this lack of flexibility might put Britain's powerful rail unions in a position to close the tunnel down through industrial action.

The French favored giving priority to rail because they would like to extend the network for their 170-m.p.h. bullet train known as the TGV, or Train a Grande Vitesse.

The three projects rejected as a result of today's decision in favor of the channel tunnel were Euroroute, an ambitious scheme that combined a rail tunnel with a road "brunnel" or half-bridge, half-tunnel spiraling underwater through an artificial island in the middle of the channel; Channel Expressway, which called for two parallel road and train tunnels, and an enclosed 12-lane suspension bridge known as Eurobridge.

Cross-channel ferry operators, who stand to lose much of their traffic to the tunnel, today threatened to wage a "price war" against the Anglo-French consortium. The shortest crossing time by ferry is 75 minutes -- against a projected 30 minutes by the proposed tunnel.

Until the construction of a separate road link, cars will be transported across the channel on special shuttle trains leaving every few minutes at peak traffic times. Total passenger traffic is expected to begin at around 16 million in 1993, the first year of operation.