Video report by ITV News Political Correspondent Dan Hewitt
The UK should prepare for a no deal Brexit as the UK and EU are still "very far apart" on key issues in negotiations, Boris Johnson has said.
The prime minister was speaking after he agreed with European Union chiefs that talks should continue.
A deadline of Sunday had been set earlier in the week by Mr Johnson and the president of the European Commission, but speaking in Brussels, Ursula von der Leyen said she and the prime minister had agreed to “go the extra mile” and continue negotiations on a post-Brexit trade deal.
Talks between the UK and the EU began again at 8am but have been deadlocked for days over disagreements on fishing rights and the so-called level playing field “ratchet” that would effectively tie the UK to future EU standards.
If no deal can be agreed on by the end of the year, then from the start of 2021 the UK will trade with the EU under World Trade Organization rules and tariffs.
Europe Editor James Mates explains why there may be some hope for a deal
Speaking in Downing Street, Mr Johnson said there is still a post-Brexit trade "deal to be done" but warned that the UK and EU "remain very far apart" on the key issues.
He said: "We are always happy to talk and to make progress where we can. I do think, as I say, there is a deal to be done if our partners want to do it. But we remain very far apart on these key issues.
"And you know what they are - the UK can't be locked into the EU's regulatory orbit and we've obviously got to take back control of our fisheries four-and-a-half years after people voted for it.
"So those are the points. I think that it is very clear what the UK is talking about, let's see what we can achieve.
"But in the meantime, get ready, with confidence, for January 1 - trade on WTO terms if we have to."
Brexit trade talks - the sticking points at a glance:
- Fishing rights: The UK wants total control over its own fishing waters after the Brexit transition period ends, with a 12 mile exclusion zone around the British Isles banning all foreign vessels. The EU wants the UK to stick to the Common Fisheries Policy, an EU agreement which gives member nations the rights to fish in European waters - more here.
- Level Playing Field: This is a concept all EU nations agree to, which ensures member nations cannot undercut others by setting their own rules on issues such as the environment, taxation and state aid. The EU says a zero-tariff trade deal is dependent on the UK agreeing to a level playing field. The UK disagrees, saying a fundamental aspect of Brexit is that the UK will be able to set its own rules.
- Governance of a deal: It's likely that any trade deal will eventually result in disputes. The EU wants the European Court of Justice to be the final authority in ruling over disputes. The UK says the ECJ should have no role and final decisions should be made by a bespoke arbiter. But the statements from both sides suggested that while further discussions would be held, substantial movement on the key issues had not been made.
Mr Johnson spoke to Ms von der Leyen for around 20 minutes in a call described by sources as "perfectly cordial".
The fact they are to continue talking beyond the Sunday deadline does indicate that some compromise is possible.
Following a phone call, a joint statement from the two leaders said: "We had a useful phone call this morning. We discussed the major unresolved topics.
“Our negotiating teams have been working day and night over recent days.
“And despite the exhaustion after almost a year of negotiations, despite the fact that deadlines have been missed over and over we think it is responsible at this point to go the extra mile.
“We have accordingly mandated our negotiators to continue the talks and to see whether an agreement can even at this late stage be reached.”
Rachel Reeves, Shadow Chancellor of the Duchy of Lancaster, said: "I think everybody would have liked to have seen a deal by now but the very worst outcome would be to crash out with no deal whatsoever on January 1 after all these months and months of negotiations so it is welcome that the talks continue.
"I hope they will swiftly conclude, but I also hope very much, on behalf of all British businesses and workers and our security as well, that the government deliver the promises they made to the British people and come back with a deal."
ITV News Political Editor Robert Peston believes that there is now only one Brexit deadline left: the end of the year.
He added he believes that the deadline extension is because "neither the UK or EU want to be blamed for ending the talks. But on level playing field, one or other side has to abandon a cherished principle. There is no available fudge. Which brings risk they will keep talking forever and no deal will happen by default."
Speaking as the statement was released, Ms von der Leyen said: "I had a constructive and useful phone call with Prime Minister Boris Johnson.
"We discussed the major unsolved topics. Our negotiation teams have been working day and night over the recent days.
"And despite the exhaustion, after almost one year of negotiations, and despite the fact that deadlines have been missed over and over, we both think that it is responsible at this point in time to go the extra mile.
"We have accordingly mandated our negotiators to continue the talks and to see whether an agreement can be reached, even at this late stage.
"The negotiations continue here in Brussels."
For UK companies that deal with Europe, the lack of clarity on trading terms after January 1 is making planning ahead difficult, as Martha Fairlie reports
A no-deal outcome would cause further damage to an economy already ravaged by coronavirus.
Analysts have suggested around £45 billion could be wiped off the value of the UK's economy in 2021, with the Office for Budget Responsibility forecasting a 2% hit to gross domestic product.
A WTO Brexit could result in tariffs and quotas being imposed on business with the EU, which is the UK's largest trading partner.
But Mr Johnson insisted the UK will do "very, very well", with WTO terms offering a "clarity and a simplicity" that has advantages.
The major sticking points in the negotiations - as they have been for months - are on fishing rights and the "level playing field" which Brussels wants to prevent unfair competition from the UK undercutting EU standards and state subsidy rules.