European leaders have announced that they want to bar Britain from cutting taxes or scrapping EU regulations as the price for a trade deal.
Donald Tusk, the President of the European Council, prompted a furious response from senior Conservatives by insisting the Britain must not seek "unfair competitive advantages" after Brexit.
The Telegraph is calling on the Conservative Party to promise a bonfire of EU red tape in its 2020 manifesto to put Britain on a radically different course.
The campaign has the support Boris Johnson, the Foreign Secretary, and a coalition of senior Tory MPs and business leaders. Government sources insisted that the UK will press ahead and axe a "swathe" of EU regulations regardless of the EU's position.
Iain Duncan Smith, a Tory MP and former Conservative leader, accused the European Union of trying to "dictate" Britain's post-Brexit future.
He said: "Once we've left we've left, if we want to change our regulations we'll change them. It's posturing, I don't know of any trade agreement that allows another country to decide what to do with its own internal rules. They can't dictate what a sovereign parliament decides for its own rules and regulations."
The European Union also put the future of Gibraltar at stake in Brexit negotiations by effectively backing Spain its centuries-old dispute with the UK over the British overseas territory.
The EU's draft Brexit negotiating guidelines appear to hand Spain an effective veto over whether the Brexit deal will apply to Gibraltar.
The move prompted fury in the UK, where ministers described the it as "utterly unacceptable". Theresa May, the Prime Minister, made clear on Wednesday that Britain will not allow Spain to take back Gibraltar against its wishes.
Fabian Picardo, the chief minister of Gibraltar: "This draft suggests that Spain is trying to get away with mortgaging the future relationship between the EU and Gibraltar to its usual obsession with our homeland. This is a disgraceful attempt by Spain to manipulate the European Council for its own, narrow, political interests."
The European Union appeared to make a significant climbdown, however, by paving the way for Brexit divorce talks to take place at the same time as negotiations over a future trade deal.
In the run-up to Mrs May formally triggering Brexit last week European leaders had refused to accept the idea that the two sets of negotiations could take place in parallel.
However Mr Tusk said that talks about the future relationship between the EU and the UK can proceed as long as "significant progress" is made in divorce talks.
The concession means that Britain does not have to settle the contentious issue of Britain's Brexit divorce bill at an early stage, which the EU claims could be as much as £50billion.
The UK is increasingly optimistic that Eastern European nations which have large numbers of migrants in the UK will help to further water down the EU#s demands.
Tomas Prouza, the Czech Republic's European Affairs Secretary, said that the size of the bill is of far less significance than migrant rights, describing it as "technical" matter.
The EU said that it wants to make the rights of European migrants living in the UK and British citizens living in Europe "priority" during Brexit negotiations. It also said it wants to ensure early agreement to ensure there is no hard border between Ireland and Northern Ireland.
In the run up to triggering Article 50 Mrs May warned that the UK could pursue a low-tax, Singapore-style economic model if she does not negotiate a satisfactory deal with Europe.
The European Council warned the UK that if it wants a "good trade deal" it cannot "dump" financial, social and environmental regulations and must accept "safeguards against unfair competitive advantages".
Under the Great Repeal Bill, which was unveiled by the Government last week, up to 19,000 EU regulations will be converted into UK law. Senior Conservatives want to overturn them after Brexit.
Jacob Rees-Mogg, a Conservative MP, said: "It's extremely important that on our departure we are not subjest to EU regulation by the back door. We don't want to go from being strangled by red tape to being garotted by red tape."