The Prime Minister handed the group of 60 islands in the Indian Ocean territory to Mauritius, prompting accusations of a "shameful retreat" and "surrender".
The Diego Garcia military base which has been used for American bombing missions in the Middle East is located on one of the islands and is leased by the UK to the US.
While the deal to hand back sovereignty includes provisions for Britain and the US to continue using Diego Garcia for 99 years, there are intensifying fears that China could exploit its close relationship with the Mauritians to use some islands to spy on the base.
Analysts also warn it will give Beijing effective control over the Chagos Islands - and many fear the Government could be forced to strike similar deals over the Falkland Islands or even Gibraltar.
Britain will pay an annual sum during the agreement and funding to help benefit Chagossians. Tory leadership candidate Robert Jenrick said: "Handing over our strategically important territory to an ally of China and paying them for the privilege is an act of surrender.
"It has clearly been announced while Parliament isn't sitting to avoid scrutiny.
"But we will fight this dangerous sellout whenever Starmer brings legislation forward to enable it."
Fellow leadership candidate Tom Tugendhat said: "This is a shameful retreat undermining our security and leaving our allies exposed."
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