Prime Minister Boris Johnson on Thursday vowed to go the "extra mile" for a Brexit trade deal but instructed his government to prepare for Britain to crash out of the European Union's single market at the end of this year.
The gloom deepened over the drawn-out Brexit saga after Johnson and European Commission president Ursula von der Leyen, over a combative dinner in Brussels, declared a Sunday deadline to decide whether to keep talking or give up.
Johnson stressed he wanted his negotiators to "keep going, and we'll go the extra mile" for a last-gasp deal, and said he was ready to travel again to Brussels, as well as to Paris or Berlin, to get one over the line.
But speaking after a rare evening meeting of the cabinet, the Conservative leader said his ministers "agreed very strongly with me that the deal on the table is really not at the moment right for the UK".
"So what I told the cabinet this evening is to get on and make those preparations" for no deal, he said.
The pound has slumped on currency markets as traders adjust to the looming possibility that after five decades of integration between Britain and mainland Europe, cross-Channel trade will be subject anew to tariffs and quotas in the New Year.
Britain left the EU on January 31 but a standstill transition period, under which it remains bound by the bloc's rules pending any new deal, ends on the night of December 31.
- 'Punishment' -
Without a post-Brexit deal, Britain's trade with its biggest market will in future operate on pared-down World Trade Organization (WTO) rules, or Australian terms as Johnson prefers to call them for public consumption.
"We're not stopping talks, we'll continue to negotiate, but looking at where we are I do think it's vital that everyone now gets ready for that Australian option," Johnson said.
He accused the EU of shifting the goalposts in the past fortnight by reviving demands for "equivalence", meaning Britain would be bound to follow future regulatory standards laid down by Brussels to prevent either side gaining a competitive edge.
Refusal would mean Britain facing "punishment, sanctions, tariffs or whatever", he said.
The other big sticking point remained EU members' future access to Britain's rich fishing waters, Johnson noted.
"After many years now of voting to leave the EU we wouldn't still have control of our waters and that's no good. And so the cabinet agreed very strongly with it that we're really not there yet at all," he said.
Britain's chief negotiator David Frost and his EU counterpart Michel Barnier resumed talks in Brussels on Thursday, despite the mounting pessimism.
- Targeted contingencies -
With nerves frayed on both sides of the Channel, von der Leyen's outline of a back-up plan to protect road, air travel and fishing rights was seen as a "no deal" warning shot.
Even though talks were still taking place, she said there was "no guarantee" any agreement could be in place by January 1 given the tight timeframe.
Several EU members, notably France, have pushed the European Commission and Barnier to take a tougher line, and publish the contingency plan to show Britain they are ready for a "no deal".
The Commission, the bloc's executive, called the plan "a set of targeted contingency measures", which would come to an end if a deal is found or after a fixed period.
Basic air transport will continue for six months provided Britain agrees to reciprocate, as will access for road haulage.
The interim fisheries regulation would continue until the end of 2021, but it provides for "continued reciprocal access by EU and UK vessels to each other's waters".
Johnson's government, which raised hopes of a breakthrough earlier this week with a separate agreement governing trade in Northern Ireland, promised only to study the proposals while restating its demands for Brussels to respect UK sovereignty.
- 'Terrible disruption' -
Many businesses are aghast at still being forced to wait to learn what rules will operate in three weeks, and accuse the government of failing to plan properly. Congestion building at key seaports is being seen as a sign of things to come.
On Wednesday, Japanese car maker Honda suspended production at its Swindon plant, west of London, because of a shortage of components.
"I think there's going to be terrible disruption in January," said James Sibley, head of international affairs at the Federation of Small Businesses.
"That will continue to be the case after the transition period ends, whether that's with a free trade agreement or otherwise."
Johnson, however, was adamant that the UK will "prosper mightily" if needs be without an EU deal. "And there are all sorts of amazing opportunities for this country."