Britain is more likely to leave the European Union's orbit on 31 December without a trade deal than with an agreement, an EU official quoted the head of the European Commission as telling the bloc's 27 national leaders on Friday.
Britain quit the EU in January but remains an informal member until 31 December - the end of a transition period during which it has remained in the EU single market and customs union.
Both sides say they want to agree arrangements to cover nearly $1 trillion in annual trade, but talks are deadlocked and British Prime Minister Boris Johnson said on Thursday there was "a strong possibility" an agreement would not be clinched.
"The probability of a no deal is higher than of a deal," the EU official, speaking on condition of anonymity, quoted European Commission President Ursula von der Leyen as saying during an EU summit in Brussels.
Johnson and von der Leyen have given negotiators until Sunday evening to break the impasse over fishing rights and allowing Britain to be punished if in the future it diverged from the bloc's rules.
"Situation is difficult. Main obstacles remain," the EU official said of von der Leyen's message. "To be seen by Sunday whether a deal is possible."
Sterling tumbled, stocks fell and implied volatility surged as investors started to price in the risk of a chaotic finale to the five-year Brexit crisis. The pound fell 0.8% against the dollar to $1.3190 before recovering somewhat.
A no-trade deal Brexit would damage the economies of northern Europe, send shockwaves through financial markets, snarl borders and sow chaos through the delicate supply chains which stretch across Europe and beyond.
Most big investment banks still say a deal is their central prediction, but some investors recall that Wall Street and the City of London were poorly prepared for Britain's 2016 Brexit referendum as few believed it would vote to leave.
While some EU diplomats have cast Johnson's rhetoric as theatrics intended to wrench out a deal and please his domestic Brexit supporters, British officials say London cannot accept the EU's demands and caution that a no-deal is on the cards.
British Culture Secretary Oliver Dowden said there was still a chance of an agreement but no British leader could accept the EU's demands.
"Still, I think, there is a significant possibility that we could get that deal," Dowden, who voted to remain in the EU in the 2016 Brexit referendum, told Sky News. "That deal cannot come at any price."
Von der Leyen said it would be clear on Sunday whether the conditions for a deal had been reached.
"It is only fair that competitors to our own enterprises face the same conditions on our own market," she told a news conference in Brussels.
"But this is not to say that we would require the UK to follow us every time we decide to raise our level of ambition... they would remain free - sovereign if you wish - to decide what they want to do. We would simply adapt the conditions for access to our market according to the decision of the United Kingdom, and this would apply vice versa."
Bank of England Governor Andrew Bailey said there was a limit to the central bank's ability to avoid all disruption or volatility in financial markets after Britain's Brexit transition period ends on 31 December.