Theresa May has been caught in a Brexit trap after EU leaders ruled Britain must pay up to secure future trade talks, while her own MPs demanded she make no more concessions.

The heads of the EU states agreed the UK had not made “sufficient progress” on the withdrawal divorce terms, according to a leaked statement drafted by Donald Tusk, the President of the European Council, just hours after confirmation that the talks are deadlocked.

They backed the EU’s chief negotiator Michel Barnier, after he said negotiations over future trade with Britain would be blocked until Ms May gave ground on paying the UK’s Brexit “divorce” bill and guaranteeing citizens’ rights.

But Conservative Brexiteers demanded the Prime Minister refuse to “feed the monster” and called on her to walk away from the negotiating table if the EU did not start talking trade.

The leak appeared to make clear that, at a key meeting of the European Council next week, EU leaders will confirm Mr Barnier’s refusal to consider trade talks now as the official stance of all member states.

Ministers in the UK have been trying to play down the significance of the blow, but pressure is building on Ms May to ensure talks progress with the time for Brexit negotiations running out before the country crashes out of the union without a deal.

Mr Barnier used a press conference to say talks had strayed into a “disturbing” deadlock and could not move on without more ground being given by UK negotiators on the EU’s priorities.

Afterwards, Antonio Tajani, the president of the European Parliament told The Independent Ms May should “deal with those” on the British side who were seeking to “unrealistically raise expectations”.

“The current situation shows that the European Parliament was correct to express its concerns over Brexit negotiations earlier this month and Mr Barnier's position is understandable,” he said.

“The deadlock unfortunately means continuing uncertainty for millions of citizens both in the UK and EU27, as well as an emotionally-charged situation in Northern Ireland that must imperatively be resolved before moving forward. The European Parliament has been unambiguous on these matters.

“I believe that the Prime Minister is genuine in her efforts to come to an agreement with the EU27 and realises that time is of the essence, but she must also deal with those who continue to challenge the agreed sequencing and unrealistically raise expectations.”

Guy Verhofstadt, the European Parliament’s Brexit chief, also backed Mr Barnier’s statement that there would be “no concessions”.

“The European Parliament is fully behind Barnier,” Mr Verhofstadt said. “There’s no sufficient progress, it’s high time the UK government comes up with concrete proposals.”

Manfred Weber, a German ally of Angela Merkel’s CDU/CSU party and the leader of the parliament’s largest group, also indicated his support – undermining Brexiteers’ hopes that the re-elected German Chancellor might push for a softer line for the UK at the forthcoming Council meeting.

In London, former Conservative Cabinet minister Nicky Morgan said there was a growing “sense of panic” among business leaders as the talks flirted with failure.

“Employers are putting in place contingency arrangements and they will have to start pressing go sooner or later,” she told The Independent.

She again criticised Boris Johnson’s recent setting out of Brexit red lines, saying: “Any mixed messages about our commitment to what was said by the Prime Minister in Florence can only be unhelpful in the negotiations.”

But while Brussels refused to allow Ms May to move talks forward without further compromise, Brexit-backing Tories in London were adamant that she not give way, but play hardball.

John Redwood said: “The Government should press on with preparing to leave without a deal. In due course the EU will then probably tell us they do want tariff free trade and will then be prepared to talk about it.”

Iain Duncan Smith said Britain should be ready to walk away from the negotiating table if the EU was still refusing to break the deadlock at the end of the year.

“It will then become very apparent that the EU is not going to do so, and we will need to say that we will make other arrangements.”

Andrew Bridgen told The Independent he backed a plan to walk away from negotiations unless the EU begins to talk trade by Christmas.

He said: “You don’t feed the monster. There is no point in continuing to make concessions until they are ready to seriously negotiate.

“There negotiating position is not to give us anything, and saying there will be no progress unless we offer more. We should say we are going to go away and better use our time preparing for a ‘no deal’ situation.”

According to the leak, obtained by Reuters, the EU leaders will tell Britain to improve its offer – while offering the prospect of a rapid move to free-trade talks in December if that happens.

The draft suggests immediate internal work on possible transitional arrangements, in order to be able to move ahead with negotiations on a future relationship as soon as possible.

"At its next session in December, the European Council will reassess the state of progress in the negotiations with a view to determining whether sufficient progress has been achieved," the draft said.

Preparations for a ‘no deal’ Brexit were at the heart of another major Brexit split in the cabinet this week – triggering a call for the Prime Minister to sack her Chancellor.

Philip Hammond warned diverting funds would mean less money for the NHS and social care – insisting he would not sanction it until the “very last moment”, if the need became clear.

But Ms May vowed to spend taxpayers’ cash immediately, telling MPs on Wednesday: “We are committing money to prepare for Brexit, including a no deal scenario.”

Ministers will be allowed to spend the cash before they've been given normal parliamentary approval, by issuing a “technical direction” the Treasury revealed.

Lord Lawson, the former Chancellor, called for Mr Hammond to be sacked, saying: “He may not intend it, but in practice what he is doing is very close to sabotage.”