In yet another twist to the four-year saga since Britain voted narrowly to quit the EU, Prime Minister Boris Johnson's government was reportedly planning new legislation to override parts of the Brexit Withdrawal Agreement it signed in January, Reuters wrote.
Britain said it would honor the divorce deal and was simply offering clarifications to the part on Northern Ireland to avoid any future legal difficulties.
But the Financial Times newspaper cited three people as saying the proposed internal market bill was expected to "eliminate the legal force of parts of the withdrawal agreement" in areas including state aid and Northern Ireland customs.
EU diplomats were aghast, cautioning that such a step – leaked on the eve of new talks in London – would tarnish Britain's global image and heighten chances of a tumultuous final disentangling from the bloc on Dec. 31.
Britain left the EU on Jan. 31 but talks on a new trade deal before the end of a status-quo transition arrangement in December have snagged on state aid rules and fishing.
The report came after Johnson said the October 15 European Council meeting was the ultimate deadline for any deal to be in place by January 1 next year.
"If we can't agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on," he said.
European diplomats said Britain was playing a game of Brexit chicken by threatening to collapse the process and challenging Brussels to blink first.
EU chief negotiator Michel Barnier acknowledged anxiety but declined to comment on the FT report. "I remain worried ... the negotiations are difficult, because the British want the best of both worlds," he told France Inter radio.
Without a deal, about $900 billion annual trade between Britain and the EU could be thrown into uncertainty, including rules on everything from car parts and medicines to fruit and data.
If no deal is agreed, Britain would have a trading relationship with the bloc like Australia's, which would be "a good outcome", Johnson was also to say on Monday.
Australia is negotiating a free trade deal with the EU to improve its market access, but for now largely trades with the bloc on World Trade Organization terms.
Brexit trade talks have been deadlocked over key issues such as the extent of EU access to UK fishing waters, state aid and fair competition rules.
Each side accuses the other of intransigence, and Johnson, despite pledging to "work hard" this month to achieve agreement, did little to indicate Britain would give ground.
Brussels has already indicated that mid-October was the latest a deal could be struck, given the need for translation and ratification by the European Parliament.