BRUSSELS (BLOOMBERG) - Brexit negotiations broke up in acrimony on Friday (Feb 9) when the European Union's chief negotiator raised the prospect of Britain crashing out of the bloc next year into a legal limbo.

Michel Barnier's comments provoked an angry reaction in London, and the pound fell.

Barnier said he was waiting to hear what Britain wanted to achieve from the talks and warned that Britain's continuing disagreement over the terms of a two-year transition period risked damaging the chances of a deal.

If arguments persist, the transition period that businesses urgently want cannot be taken for granted, he told reporters in Brussels.

His British counterpart David Davis hit back, saying he was surprised by Barnier's comments and accused the EU of a "fundamental contradiction" in its approach to the talks.

The dispute matters because Britain and the EU have just over a month to strike a deal on the terms of the transitional period that is due to come into force after Brexit in March 2019. Only once this is agreed can the negotiations move on to discussing the shape of the future trade partnership between Britain and the EU.

"Transition today is not a given," Barnier said. Still, he hopes the disagreements will be solved in the next negotiating round.

"Time is short, very short, we don't have a minute to lose if we want to succeed."

Transition is crucial for business as the future trade deal between the two sides almost certainly won't have been completed on the day Britain leaves the bloc, so businesses on both sides would plunge into a legal and regulatory limbo in March next year.

That would mean tariffs would be slapped on goods, and in the worst case, data transfers, air travel and food supplies could also be disrupted.

Businesses have set a deadline of late March this year to get a deal pinned down before they activate their contingency plans - moving jobs and business out of Britain.

While many banks have already taken steps to protect their business and aren't relying on a transition deal, they are still hoping to have the time to rewrite contracts and prepare for the future setup.

A senior British official said that it was not a given that Barnier could keep all EU member states on board, as EU businesses also want a transition deal. The official also pointed out that the £39 billion (S$70 billion) financial settlement would be off the table without an agreement, predicting that the EU is talking tough now and would eventually give ground.

Prime Minister Theresa May, under pressure from hardline Brexit backers in her party, has toughened her stance on the transition in recent weeks.

Initially, Britain was expected to accept the EU's conditions wholesale, but amid accusations that the arrangement will leave Britain a "vassal state" of Brussels, she has raised a series of objections.

NEW RULES

Transition will preserve access to the single market and Britain will have to keep abiding by all the rules, while having no say in making them and no voting power in the bloc. Britain doesn't want to have to accept new rules that are made during the transition amid fears the EU could adopt rules that would hurt British interests.

The EU has also toughened its stance, and has threatened to unilaterally suspend Britain from the benefits of the single market if it breaks rules during the two-year period. Barnier said the EU is defending the integrity of the single market.

Both sides have also raised the prospect of the timetable slipping for the withdrawal agreement from an initial target of October, which was intended to allow the deal to go to the British and EU parliaments for approval in time for exit day in March 2019.

British Brexit Secretary Davis has said year-end may be a more realistic deadline, while Barnier mentioned November on Friday.

Britain didn't provide the EU with an update on the future relationship on Friday as planned. That was because of scheduling issues, Barnier said, but he added that he was waiting for Britain to make its choices clearer.

May's Cabinet is yet to decide on what kind of future trade deal it will seek.

"Given the intense work that has taken place this week, it is surprising to hear that Michel Barnier is unclear on the UK's position in relation to the implementation period," Davis said, adding that he's seeking a new relationship between the EU and Britain as "the closest of friends and allies."