British Prime Minister Boris Johnson will meet EU Commission President Ursula von der Leyen in Brussels to discuss the differences between the two sides after deadlocked Brexit trade talks.
The two leaders spoke on the phone for the second time in 48 hours on Monday evening and agreed to ask their chief negotiators to prepare an overview of the “remaining differences”.
The pound had its biggest drop in more than three months on Monday as the threat of a no-deal divorce between Britain and the EU increased by the hour.
Negotiations were in the final stretch as officials from both sides tried to salvage a trade deal after a weekend without progress.
The UK and EU are still at odds over access to British fishing waters, a longstanding disagreement, while post-Brexit competition rules and enforcing any deal are also causing problems for negotiators.
The meeting between Mr Johnson and Ms von der Leyen will determine whether the two sides can forge a deal.
If one is not reached, it could cost hundreds of thousands of jobs on both sides and disrupt cross-Channel trade for years to come.
“As agreed on Saturday, we took stock today of the ongoing negotiations," Ms von der Leyen and Mr Johnson said in a joint statement after the call.
"We agreed that the conditions for finalising an agreement are not there due to the remaining significant differences on three critical issues: a level playing field, governance and fisheries.
“We asked our chief negotiators and their teams to prepare an overview of the remaining differences to be discussed in a physical meeting in Brussels in the coming days.”
The gloomy outlook resonated in Brussels and London on Monday.
Earlier that day, EU chief negotiator Michel Barnier told sceptical MEPs that Wednesday was the effective deadline to strike a deal.
The EU summit begins on Thursday when leaders of the 27 member states in the bloc will either hear the outline of a deal or the admission that one will not be reached.
The increasing prospect of a no-deal Brexit sent the pound into retreat, dropping as much as 1.6 per cent against the US dollar as the threat of a hard Brexit loomed.
If the currency’s drop hits 1.8 per cent, it will be the steepest since March and would drag sterling to $1.32, a key support level.
The FTSE 100 benchmark index, which has a negative correlation with the pound, rose 0.8 per cent, while the Stoxx Europe 600 fell as much as 1 per cent.
Mr Barnier was "rather downbeat as to the prospects of agreement" at a meeting with national envoys in Brussels on Monday, a diplomat said.
They said Mr Johnson would have to make the ultimate call on a deal.
Irish Foreign Minister Simon Coveney said Mr Barnier’s message sounded foreboding.
“I would say he is very gloomy and obviously very cautious about the ability to make progress today,” Mr Coveney told RTE.
The president of the European Council, Charles Michel, held a video call with Ms von der Leyen, French President Emmanuel Macron and German Chancellor Angela Merkel to discuss the agenda of Thursday's EU summit, as well as Brexit.
UK Foreign Office minister James Cleverly said a deal was preferable but that the UK was prepared to leave the EU without one.
“I would prefer a deal with the EU but I wouldn’t want to be tied into a set of arrangements that would prevent us from doing trade deals around the world," Mr Cleverly told BBC Radio 4.
“Like the vast, vast majority of people we would prefer a deal but not one at any cost.”
Irish Prime Minister Micheal Martin said on Sunday that the chances of a deal were 50-50, while investment bank JPMorgan said chances of a no-deal Brexit had risen to a third from 20 per cent.
On Thursday, the outline of any deal or an admission of failure to strike one will be put to the leaders of the EU's 27 member states.
Failure to secure a deal could bring disruption to borders, financial markets and the delicate supply chains that stretch across Europe and beyond, at the same as the world tries to cope with the vast economic cost of the pandemic.
EU diplomats said it was a crucial moment for the UK and the bloc.
Sebastian Fischer, an EU spokesman for Germany, current holder of the EU presidency, spoke of "decisive hours for the future of EU-UK relations".
In a move that could further undermine the talks, the British government will press ahead with draft laws this week that would breach London's earlier divorce treaty with the bloc.
Mr Cleverly said on Monday that the clauses that breach the treaty would be reinstated.
