The pound declined in choppy trading on Friday as Brussels told EU leaders that “no deal” appeared to be the most likely outcome of trade talks with the UK, echoing a warning from Boris Johnson.

But the leaders also rejected the UK prime minister’s claims that the bloc is seeking to bind Britain to its regulations in a sign that negotiators may still have scope to tease out a compromise. Dutch prime minister Mark Rutte said it would be inexplicable to the rest of the world if talks failed.

Sterling slipped as much as 1.2 per cent in afternoon dealing, before trimming its losses to around 0.4 per cent to trade at $1.3241. It has shed 1.5 per cent over the past week in its biggest slide since September.

UK bank shares were also under pressure, with Lloyds, NatWest and Barclays all down more than 3 per cent on Friday.

Ursula von der Leyen, the European Commission president, on Friday told reporters after an EU summit in Brussels that the two sides’ positions “remain apart on fundamental issues” in their future relationship talks, with little time remaining until Mr Johnson and the EU take a decision on Sunday on whether it is worth continuing.

Earlier on Friday morning, Ms von der Leyen had told leaders that there was a “higher probability” that talks would fail rather than succeed, according to people briefed on the presentation.

Despite the gloom hanging over the negotiations, there were clear signs that EU leaders believe a deal can still be done. Dutch prime minister Mark Rutte said after the summit: “It would be unexplainable to the world if the UK and Europe were not able to come to a deal in these times of upheaval.”

The EU was “willing to compromise” to get an agreement, but it would never agree to “jeopardise the integrity” of its single market, Mr Rutte said.

Mr Johnson said on Friday morning that the UK was prepared to exit its post-Brexit transition period on January 1 without an agreement with its largest trading partner. Speaking on a visit to Northumberland, he said that he had not sought a no-deal Brexit but it would be “wonderful for the UK”.

The prime minister had on Thursday blamed what he said was Brussels’ insistence on keeping the country “locked in the EU’s orbit” and requiring the UK to match future changes to the bloc’s regulations or risk losing market access.

But Ms von der Leyen was clear that Brussels was not insisting that the UK would be required to follow every time the EU raised its “level of ambition” in regulatory matters, such as environmental standards.

“They would remain free — sovereign if you wish — to decide what they want to do,” Ms von der Leyen said at a press conference. “We would simply adapt the conditions for access to our market [according] to the decision of the UK. And this would apply vice versa.”

The comments underline how fair competition has become the central issue of trade talks, with the EU adamant that any agreement must guarantee a “level playing field” for companies that endures over time.

Mr Johnson’s interpretation was also directly challenged by Mr Rutte, who insisted that the prime minister’s claims that the EU wanted the two sides to be “a bit like twins”, or wanted Britain to “automatically” apply EU rules in exchange for market access, were inaccurate.

“That is not what we ask of him,” Mr Rutte said, adding that the issue at hand was how to design a system of “managed divergence” that would allow the two sides’ rules to evolve differently while preserving a level playing field.

“This has nothing to do with freedom or sovereignty — he is sovereign, is free,” Mr Rutte said.

Brussels has proposed an “evolution mechanism” that would allow one side to request consultations if it was concerned that an imbalance in regulations was putting its companies at an unfair disadvantage. Tariffs could be used to re-level the playing field as a last resort.

Britain has rejected the plan as an attack on regulatory freedom.

Failure in the trade negotiations would bring with it economic upheaval, including the introduction of tariffs on EU-UK trade after the end of the Brexit transition period on December 31, which would strike an especially hard blow to agriculture.

Ms von der Leyen said that negotiations would resume on Friday in Brussels between EU chief negotiator Michel Barnier and his UK counterpart, David Frost.

The consensus among market analysts and investors remains that some form of deal can still be sealed.

Sterling could suffer further if a deal was not agreed, said Mark Haefele, chief investment officer at UBS Global Wealth Management. “But next week remains in play, and our base case is that a deal will be reached,” he added.

Downing Street said that Mr Johnson was determined to “go the extra mile” if necessary to get a deal and was prepared to go to Brussels, Paris or Berlin.

French president Emmanuel Macron noted after the summit that “the exit of the UK will not happen in a disorderly way” because the two sides already have a divorce agreement in place.

On the question of fishing rights in UK waters, the other main outstanding issue in the talks, he said: “I don’t want to have my cake and eat it, I just want my proper slice of cake.”

Additional reporting by Victor Mallet in Paris