EU Council President Donald Tusk opened a crucial summit in the Austrian city of Salzburg with a stark warning that Britain's position on key issues must be "reworked".
He warned negotiations on Britain's withdrawal from the European Union were reaching a "decisive phase", amid fears that it could crash out in March next year without a deal.
While welcoming the "positive evolution" of Britain's position on security ties, Tusk said that on the Irish border and post-Brexit trading relations, "the UK's proposals will need to be reworked and further negotiated".
British Prime Minister Theresa May answers questions when arriving at the informal EU summit in Salzburg, Austria. Source: AAP
Austrian Chancellor Sebastian Kurz, who hosted the Salzburg summit, added that the EU was "ready to compromise but we also expect that from the UK", calling for May to offer a "step forward".
But as she arrived for the summit, May said that Brussels must also give ground.
"If we are going to achieve a successful conclusion then, just as the UK has evolved its position, the EU will need to evolve its position too," she said.
She added: "I am confident that with goodwill and determination we can agree a deal that is right for both parties."
The prime minister will deliver her message to the other EU leaders in person over dinner, before they meet without her on Thursday to discuss the next steps.
'Hard border'
Officials on both sides of the Channel hope Salzburg will give new impetus to divorce negotiations ahead of a crunch summit in Brussels on October 18.
That was originally viewed as the deadline for a deal, but Tusk is planning a last-gasp gathering in mid-November.
A key sticking point in the talks is how to avoid a "hard border" between British-ruled Northern Ireland and the Irish Republic when London leaves the EU single market and customs union.
There are fears that frontier checks would disrupt trade and could undermine the 1998 peace deal on the island.
But Europe is insisting on a fall-back plan, a "backstop", that would keep Northern Ireland in the customs union under EU rules while a future trade relationship is negotiated.
London sees this as a threat to its sovereignty and refuses to countenance a de facto Irish Sea frontier.
Europe's chief Brexit negotiator Michel Barnier this week indicated a shift in his position, saying any checks between Northern Ireland and the rest of the UK could be away from the border.
May welcomed his recognition of "the need to find a new solution, because the original proposal put forward by the European Commission was unacceptable".
EU Brexit negotiator Michel Barnier. Source: AAP
She conceded that some checks were already carried out in the Irish Sea, for example on agricultural products.
"But what we cannot accept is seeing Northern Ireland carved away from the UK customs territory because regardless of where the checks would be, what that would mean would be that it would be a challenge to our constitutional and economic integrity," she said.
May's parliamentary majority depends on support from Northern Ireland loyalists bitterly opposed to any weakening of links with the UK.
Future ties
Despite continued hopes of a deal, both sides are also preparing for the possibility that Britain stumbles into a chaotic and damaging break-up.
Kurz said that failing to reach a deal "would be difficult for Europe but it would be terrible for the UK".
Officials say that 80 percent of the divorce settlement is agreed, but that progress must be made quickly on Ireland and on the parallel political statement that will lay out a blueprint for future relations.
London wants a detailed outline of future trade ties in exchange for paying billions of euros the EU says it is owed in dues.
Brussels appears ready to fudge a plan to at least get the UK departure from the bloc out of the way, although this may not be acceptable to May's restive MPs at home.
Anti-Brexit sentiment remains in Britain. Source: AAP
One EU diplomat told AFP that leaders in Salzburg wanted to give May something to take back home, ahead of a meeting of her fractious Conservative party next month.
They realise May is the only one who can seal a deal on Brexit and they do not want her to "go belly up", the diplomat said.
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