The future of an estimated 100,000 jobs has been plunged into doubt after a close political ally of the German chancellor, Angela Merkel, and president of the European commission, Jean-Claude Juncker, warned that a prized sector in the City of London must relocate to EU soil after Brexit.

Manfred Weber, the leader of the centre-right European people’s party – the largest political group in the European parliament, to which both the German chancellor and the commission president belong – told reporters that euro-denominated clearing could no longer be undertaken in the City when the UK leaves the EU.

“EU citizens decide on their own money,” Weber said during a press conference in Strasbourg on Tuesday. “When the UK is leaving the European Union it is not thinkable that at the end the whole euro business is managed in London. This is an external place, this is not an EU place any more. The euro business should be managed on EU soil.”

Such a development would be a huge blow to the British economy. Six months ago, the head of the London Stock Exchange, Xavier Rolet, said at least 100,000 positions could be lost if the City’s clearing houses lost their ability to process euro-denominated transactions.

Clearing houses are independent parties that sit between the two parties in a trade and are tasked with managing the risk if one side defaults on payment. London clears around three-quarters of all euro-denominated trades.

Talking in September, Rolet said he was confident the City would not be stripped of the business, but he went on to say that job losses would not be limited to London but shed across the UK in risk management, compliance, middle office and back-office support functions.

A recent report from the accountants Ernst & Young echoed those comments, but additionally claimed that losing the business could have “a significant domino effect on jobs and revenue”, hitting up to 232,000 workers throughout the UK.

London’s dominance in the sector has long been a source of contention within the EU, with the French government being particularly aggressive in attempts to get in on the trades.

Britain fought a four-year battle in the courts to block an attempt in 2011 by the European Central Bank to require clearing houses with significant euro-denominated business to be based in the euro zone.

Weber’s comments now make it more likely that the bank will mount a fresh challenge by re-establishing a controversial “location policy” for the euro or by changing regulations.

The British government has sought to lobby that any attempt to split off euro-denominated clearing would not benefit the EU, with business instead drifting to New York.

However, Weber, speaking ahead of a debate on Brexit in the European parliament, said he feared too many British citizens and politicians did not understand the full repercussions of the country’s decision last June.

He said he had been surprised by the reaction in the UK to the decision by the EU to give Spain a veto on allowing Gibraltar to benefit from any future EU-UK trade deal. “From now on we will have the interests of the EU27 in mind, not of the British,” Weber said. “That’s the outcome when you leave this family.

“Some of the politicians in London have not understood what leaving the European Union means. It means being alone.”

On the future of the financial services sector in the UK, and euro-denominated clearing in particular, Weber added: “Great Britain after leaving will be a third country.

“We have to find a way of working together, but we have the obvious interest that places like Amsterdam, Paris, Dublin and Frankfurt can win as they [London] lose.”

Commenting on the jobs warning, John McDonnell, Labour’s shadow chancellor, said: “This threat to 100,000 jobs was all too predictable, given the Tories’ extreme approach to the Brexit negotiations. This is yet another major concern facing our country since Theresa May triggered article 50, and yet Tory ministers appear stunned and unprepared when obvious issues arise.

“We need to know immediately from the government what its strategy is to protect jobs in the finance sector, because all we have witnessed so far is silent bewilderment.

“Labour will fight for a Brexit that works for everyone, unlike the hard-right Tory elite who want a low-wage, tax-haven, bargain-basement economy. Our six tests, including preserving existing benefits of membership, must be met before Labour will support any Brexit deal.”

The Liberal Democrats’ treasury spokesperson, Susan Kramer, said: “The hard Brexit chosen by this government is set to take a wrecking ball to the UK financial sector, threatening thousands of jobs and billions of pounds of tax revenue.

“That will mean more public sector cuts and hospitals and schools not getting the funding they need. A more conciliatory approach, including remaining a member of the single market, could avoid this disastrous outcome.

“Instead, Theresa May is opting for the hardest of hard Brexits with no regard for the consequences.”