Britain and the European Union struck a pessimistic tone in trade talks on Thursday, with Prime Minister Boris Johnson saying it was "very likely" there would be no agreement unless the bloc changed its position "substantially".
Just over two weeks before Britain finally leaves the bloc's orbit, European Commission President Ursula von der Leyen was also downbeat, saying it would be "very challenging" to overcome the "big differences" that remained.
Both sides have called on the other to shift position to try to safeguard almost a trillion dollars worth of trade from tariffs and quotas when a so-called transition period ends on Dec. 31.
Since Britain left the EU in January, the talks have been largely hamstrung over two issues – the bloc's fishing rights in British waters and on creating a so-called level playing field providing fair competition rules for both sides.
After a call between Johnson and von der Leyen to take stock on the talks, a spokesperson for the British leader said: "The prime minister underlined that the negotiations were now in a serious situation."
"Time was very short and it now looked very likely that agreement would not be reached unless the EU position changed substantially … He said that, if no agreement could be reached, the UK and the EU would part as friends, with the UK trading with the EU on Australian-style terms."
Australia does not have a free trade agreement with the EU and most of their trade is on World Trade Organization rules.
Von der Leyen said she welcomed "substantial progress".
"Yet big differences remain to be bridged, in particular on fisheries. Bridging them will be very challenging," she said on Twitter, adding that talks were continuing.
The pound fell slightly against the dollar after the statements.
Earlier, comments by British interior minister Priti Patel that talks had entered the "tunnel" – EU jargon for the final, secretive make-or-break phase – and by EU chief negotiator Michel Barnier that good progress had been made had buoyed financial markets.
But Michael Gove, a senior British minister who is responsible for implementing an earlier divorce deal, told a parliamentary committee that the probability of reaching a deal was "less than 50%".
He added that, if the British parliament did not have time to pass the deal into law by Dec. 31, "then the clock has run out and no agreement would have been reached and we will be in a world where we will be trading on WTO terms".
Gove said later he believed the last possible deadline for getting a deal was in the days immediately after Christmas.
Failure to agree a deal on goods trade would send shockwaves through financial markets, damage European economies, snarl borders and disrupt supply chains across Europe and beyond.
Since Britain formally left the EU on Jan. 31 it has been in a transition period under which rules on trade, travel and business remain unchanged, with the country still within the EU customs union and single market. Many deadlines have been missed in the talks to find a trade deal.
Johnson, the face of the 2016 Brexit referendum campaign, has long said he will not accept a deal that fails to respect British sovereignty after winning an election last year on a pledge to "take back control".
Gove said some of the remaining differences went "to the very heart of the (government's) mandate".
An EU official who declined to be named said disagreements over fisheries were not yet resolved but that intensive talks on a way forward on quotas and a transition period were underway. Two EU diplomats and an EU official said they did not expect a deal to come together by Friday.
The European Parliament said it could hold an emergency plenary in late December if a deal is reached by Monday. If it came later EU diplomats said the bloc might still put it in place from Jan. 1, without lawmakers' consent.
The EU's von der Leyen said this week there was now a "very narrow" path to agreement, though success was not guaranteed.
Two main issues – level playing field fair competition guarantees for business activity on both sides, and fisheries – remain unresolved.
Johnson portrays Brexit as a chance to build Britain into a fully independent economy that would be much more agile than its competitors, and so does not want to be tied into the EU's orbit and its rules for years to come.
EU powers are concerned London wants the best of both worlds – preferential access to lucrative EU markets, with the advantage of setting its own rules.