The British pound sank on Monday after Prime Minister Boris Johnson appeared to revive investor fears of a no-deal Brexit as London set a six-week deadline for a deal with Europe on trade.
British officials confirmed that new legislation on the country's internal trade regime could undermine key parts of the 2019 withdrawal agreement that allowed Brexit to take place last year.
The announcement triggered a backlash from governments around Europe as accusations of bad faith negotiating were flung at Mr Johnson. The Irish Minister for Foreign Affairs, Simon Coveney it would be “a very unwise way to proceed” after it emerged London was ready to override the Withdrawal Agreement.
Sterling fell on the foreign exchanges with losses of 1.0 per cent versus the dollar and 0.8 per cent against the European single currency.
Mr Johnson has given an October 15 deadline for a post-Brexit trade agreement with the European Union, brushing off fears about "no-deal" chaos if talks fail.
"If we can't agree by then, then I do not see that there will be a free-trade agreement between us," Mr Johnson said, insisting it would still be a "good outcome" for Britain.
EU leader Ursula von der Leyen warned that Britain is legally obliged to respect the Brexit withdrawal agreement, which must form the basis of bilateral relations going forward.
Others directly accused Mr Johnson of going back on his word. "There were signs that the joint political declaration for Boris Johnson was not worth the paper it was on. Now he’s said it. Boris Johnson is thus turning the negotiations up to now and the serious efforts of the European Union into a farce," said German MEP, Bernd Lange.
The report cited three people close to the plans as saying a bill to be put before parliament this week would undermine agreements relating to Northern Ireland customs and state aid.
"Judging by today's price action in the pound, investors appear to believe that Johnson has indeed resurrected the spectre of a no-deal Brexit," ThinkMarkets analyst Fawad Razaqzada said.
"However, I reckon it is all part of negotiation tactics - and in the end a cliff-edge Brexit will probably be avoided as it is not in either party's interests."
In response to the report, Downing Street said only that it was still "working hard to resolve outstanding issues with the Northern Ireland Protocol" but was considering "fall-back options".
The eighth round of negotiations resume in London this week, with both sides talking increasingly tough, amid accusations of intransigence and political brinkmanship.
The weak pound meanwhile handed a fillip to the London stock market as it boosted shares of multinationals earning in dollars.