Plans for a Brexit transition period have been thrown into doubt by EU chief negotiator Michel Barnier, who says it is "not a given" if disagreements persist.
Mr Barnier said time was "very short" for both sides to strike a deal to stop a cliff-edge departure on Brexit day.
He claimed there were still "problems" in Brussels "understanding the position" of the British Government.
His comments sent the pound sliding by a cent against both the dollar and the euro.
Prime Minister Theresa May this week vowed to be "robust" in the face of EU demands , including the continuation of freedom of movement during the transition.
Responding, Mr Barnier said: "I'm surprised by these disagreements and if they persist, a transition is not a given.
"I wasn't talking about a threat. We have to bear in mind what the UK has said. I have some problems understanding the position. They themselves asked for this transition period.
"The EU27 heads of government said yes on the basis of very logical positions. It's understandable.
"But if this disagreement were to persist there will undoubtedly be a problem."
Mr Barnier also tried to defuse a row with David Davis, after the Brexit Secretary fumed that Brussels was "unwise" to devise a plan to sanction Britain during the transition .
He insisted he had always been objective and calm, and refused to be drawn into a discussion about "discourteous" language.
The former European Commissioner added there was still no final agreement on the Northern Ireland border issue.
"It is important to tell the truth," he cautioned.
Mr Barnier said the only option that could be put into the final withdrawal agreement at present was Northern Ireland adopting "full regulatory alignment" with the EU.
He complained Britain's offer of specific solutions was not yet viable because "we are waiting for such solutions".
The comments from a media conference in Brussels came at the end of a week of technical talks between both sides' negotiators.
There was laughter in the hall as Mr Barnier was asked why the UK was not giving a presentation on Friday on what it wants from the future partnership.
"The time has come to make choices, and we await with great interest the choices," he said.
In a statement, Brexit Secretary David Davis said Brussels was trying to "have it both ways" over the transition.
He said: "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".
The UK was seeking a "time-limited period that maintains access to each other's markets on existing terms" but "for any such period to work, both sides will need a way to resolve disputes in the unlikely event that they occur".
"But there is a fundamental contradiction in the approach the Commission is taking.
"Today they acknowledged that a way to resolve disputes and infringements is needed.
"Yet at the same time they dismissed the UK's push for reasonable safeguards to ensure our interests are protected. It is not possible to have it both ways."
Labour's shadow Brexit secretary Sir Keir Starmer said the comments should come as a "wake-up call" to Mrs May.
"Theresa May must end the infighting within her Cabinet, drop her reckless red lines and accept Labour's proposals for a transitional deal.
"That means seeking to remain in a customs union with the EU and within the single market during that period. It means we would abide by the common rules of both.
"If the Prime Minister fails to meet Labour's demands then she is putting British jobs and the economy at risk."
Plaid Cymru's Brexit spokesman, Hywel Williams, said: "If Northern Ireland stays within the EU's single market and customs union, it becomes an economic necessity for Wales to be given the same deal.
"Creating a hard border between Wales and Ireland (Other OTC: IRLD - news) would put devastating pressure on Wales's external border, and grind our ports to a halt, including the UK's second busiest port in Holyhead."