Following a tense diplomatic standoff in which Napoleon III attempted to purchase Luxembourg from the Dutch king and Prussia objected, the great powers convened in London and guaranteed Luxembourg's independence and neutrality. The settlement required Prussia to withdraw its garrison from Luxembourg's fortress, narrowly averting a Franco-Prussian war three years before one broke out anyway.
Luxembourg's tiny size belied its strategic importance. Its fortress city, sometimes called the 'Gibraltar of the North,' sat garrisoned by Prussian troops even though the surrounding grand duchy belonged personally to the Dutch king William III. When Napoleon III tried quietly negotiating its purchase in 1867 to compensate France for Prussia's growing power after its victory over Austria, Otto von Bismarck leaked the scheme, inflaming German nationalist opinion and pushing the two powers to the brink of war.
Britain, Austria, Russia, and Italy convened a conference in London to defuse the crisis. The resulting treaty declared Luxembourg 'perpetually neutral,' guaranteed collectively by the powers, and required the demolition of its fortifications and withdrawal of the Prussian garrison — a face-saving compromise that let both France and Prussia step back from war.
The peace proved temporary in the grand scheme: France and Prussia fought their war just three years later in 1870 over different pretexts. But Luxembourg's neutral status endured, shaping its unusual identity as a small, fiercely independent state wedged between great powers, until German invasion violated that neutrality twice in the 20th century's world wars.