Boris Johnson has put business and the public on notice to prepare to leave the European Union without a deal.
Speaking a day after crisis talks with EU chief Ursula von der Leyen ended without a breakthrough, Mr Johnson said there was a “strong possibility” the UK would not strike a deal with its largest trading partner.
The warning came as Irish Prime Minister Michael Martin insisted “97 per cent of the deal had been agreed”.
Mr Martin pleaded with both sides to reach agreement because there are “no winners and losers” in a no-deal situation.
Ireland is the EU member state most at risk from Britain crashing out of the bloc without a deal.
Mr Martin said: "Dialogue is key and both teams have given themselves a deadline of this Sunday, and I think the key to unlocking this is to stand back and look at the overall picture here.
“There can be no winners or losers in these negotiations from now on. There has to be a common purpose in terms of getting a deal over the line because it makes sense to get a trading deal.
However, Mr Johnson said the bloc’s demand that the UK follow future changes in EU rules was a major obstacle.
“There’s now the strong possibility we will have a solution that’s much more like an Australian relationship with the EU than a Canadian relationship with the EU,” Mr Johnson said.
“Looking at where we are, I do think it’s vital that everybody now gets ready for that Australian option.”
Shadow Foreign Secretary Lisa Nandy said the opposition Labour party was prepared to support a deal.
She told BBC Radio 4's Today programme: "A deal is better than no deal. It represents a floor not a ceiling of what we can achieve for this country.
“But what we can’t have is a situation where the government is actively doing harm to our businesses and preventing them from thriving and doing well.”
The “Australian option” is Downing Street’s code for no deal.
In that scenario, the UK would fall back on the rules of the World Trade Organisation and face tariffs, as well as quotas, when the transition ends on December 31.
Former Australian premier Malcolm Turnbull told BBC's Question Time that his country doesn't have a "satisfactory" trade relationship with the EU.
“Be careful what you wish for: Australia’s relationship with the EU is not one, from a trade point of view, that Britain I think would want,” he said.
“There are very big barriers to Australian exports, agricultural products in particular. There’s a lot of friction in the system in terms of services. So there’s a lot to aim for.”
The pound extended its decline after Johnson’s intervention. His remarks couldn’t come at a more delicate time as EU leaders meet in Brussels after seeing off a threat by Hungary and Poland to block a $2.2 trillion stimulus package.
Earlier on Thursday, the EU published its contingency plans in case trade talks collapse.
The bloc aims to maintain basic air and road links between EU nations and the UK, while also allowing access to each other's fishing waters.
The European Commission said there was "significant uncertainty" about whether a deal would be in place by January 1.
"Our responsibility is to be prepared for all eventualities, including not having a deal in place," Ms von der Leyen said.
Among the contingency measures in place for no deal are:
- the provision of "certain air services" between the UK and EU for six months, provided the UK does the same
- basic connectivity for road freight and passenger transport for six months, provided the UK does the same
- the possibility of reciprocal fishing access for UK and EU vessels in each other's waters for one year, or until an agreement is reached
After Mr Johnson arrived in Brussels on Wednesday evening for a dinner with the head of the EU, Downing Street said there were still "very large gaps" in the talks.
"The PM and VDL agreed to further discussions over the next few days between their negotiating teams," a senior No 10 source said, adding that by Sunday "a firm decision should be taken about the future of the talks".
Ms Von der Leyen tweeted: “We had a lively and interesting discussion on the state of play on outstanding issues. We understand each other’s positions. They remain far apart.
"The teams should immediately reconvene to try to resolve these issues. We will come to a decision by the end of the weekend.”
The two leaders hope to inject impetus into trade talks deadlocked on key aspects of the future relationship.
But Britain and the EU gave ominously opposing views of the main sticking points, and each insisted the other must move to reach agreement.
The dinner meeting followed weeks of deadlocked negotiations between the two sides, who disagree on a level playing field, fishing rights and how any agreement would be regulated.
Mr Johnson is to work through a list of major sticking points with Ms Von der Leyen, who will then update the 27 leaders of UN member states on the status of a deal at the EU council meeting on Thursday.
“A good deal is still there to be done,” Mr Johnson said.
But he told MPs in the House of Commons that the EU’s demands that the UK continue to adhere to the bloc's standards or face retaliation were not “terms that any prime minister of this country should accept".
German Chancellor Angela Merkel said “there is still the chance of an agreement” but stressed that the EU would not compromise its core principles.
Britain left the EU on January 31 after 47 years of membership, but remains in the bloc’s tariff-free single market and Customs union until the end of the year.
Reaching a trade deal by then would ensure there are no tariffs or quotas on trade in goods on January 1, although there would be new costs and limits for businesses.
When Mr Johnson was flying over the English Channel to Brussels, below him the effects of Brexit were already visible.
There were extra long lines in Calais, France, where truckers were trying to meet the demands of UK companies that want to lay in extra stock ahead of possible disruption on January 1.
Failure to secure a trade deal would cause much greater disruption, bringing tariffs and other barriers that would hurt both sides.
Most economists think the British economy would take a greater hit because the UK does almost half of its trade with the bloc.
Months of trade talks failed to bridge the gaps on the three issues.
While both sides want a deal, they have fundamentally different views of what it entails.
The EU fears Britain will slash social and environmental standards and pump state money into UK industries, becoming a low-regulation economic rival on the bloc’s doorstep.
That brought the demand for strict “level playing field” guarantees in exchange for access to its markets.
“The integrity of the single market must be preserved,” Ms Merkel said.
“We must have a level playing field not just for today, but we must have one for tomorrow or the day after.
"And to do this, we must have agreements on how one can react if the other changes their legal situation."
Mr Johnson’s government regards Brexit as being about sovereignty and “taking back control” of the country’s laws, borders and waters.
It claims the EU is making demands that it has not placed on other non-member countries and is trying to bind the UK to its rules indefinitely.
“Our friends in the EU are insisting that if they pass a new law in the future with which we in this country do not comply or don’t follow suit, then they want the automatic right to punish us and to retaliate,” Mr Johnson said.
He called the bloc’s demands unacceptable.
Downing Street said that if the two leaders can make progress at their three-course dinner, their chief negotiators, who are also attending the meal, could resume talks on a final deal.
Amid the gloom, one area of tension was resolved.
The British government has dropped plans to break international law after reaching an agreement with the EU on rules governing trade with Northern Ireland, the only part of the UK that shares a land border with the bloc.
The Brexit divorce agreement struck by the two sides last year promised there would be no Customs checks or other trade barriers along Northern Ireland’s border with EU member Ireland.
The British government introduced legislation in September enabling it to breach the legally binding withdrawal agreement, to keep goods flowing to Northern Ireland in the event of a no-deal Brexit.
Britain claimed the bill was needed as a safety net but the move infuriated the EU, which considered it an act of bad faith that could imperil Northern Ireland’s peace settlement.