Theresa May is backing away from her threat to crash out of the EU with ‘no deal’ as she realises the huge economic damage it would cause, EU diplomats believe.

The Government now realises the hardline stance went too far by bolstering the confidence of Brexit supporters with the “intention of creating chaos”, they say.

In private, British officials are ready to discuss the UK remaining in the EU’s customs union as part of a transitional arrangement, one told the BBC.

Allowing the European Court of Justice some sway over British law and high immigration – despite Ms May’s supposed ‘red lines’ on the issues – are also said to be on the table.

A Government spokesman told the BBC it “did not recognise” the claims being made by the EU diplomats, who are based in this country.

But there is speculation that the Article 50 letter – to be delivered in Brussels tomorrow – will not repeat Ms May’s warning that “no deal for Britain is better than a bad deal”.

It was issued in January, winning loud cheers from many Conservative MPs and the Tory press, apparently setting Britain on course for a ‘hard Brexit’.

But EU diplomats believe it lacks credibility, because of the huge costs likely to be imposed on the British economy if no agreement – even a transitional one – is reached.

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Under World Trade Organisation rules, firms would face tariffs on most goods and more ‘red tape’, if the EU refuses to recognise the UK’s regulatory standards.

“They have realised that 'no deal is better than a bad deal' won't fly,” one diplomat told the BBC.

“They are worried about people in this country who have an ideological and political intention of creating chaos. The civil service has told them it would create havoc.”

The number of customs checks on goods would soar from 17m each year to 350m, he pointed out.

Another diplomat added: “The British do realise that [immigration curbs] are a bad idea for British society and economy. They will focus more on control and not quantitative limits.”

Earlier this month, Brexit Secretary David Davis stunned MPs by admitting the Government has done no economic assessment of crashing out of the EU with ‘no deal’.

But Michel Barnier, the European Commission’s lead Brexit negotiator, has warned that leaving with no agreed trading arrangements would “undoubtedly leave the UK worse off”.

“Severe disruption to air transport and long queues at the Channel port of Dover are just some of the many examples of the negative consequences of failing to reach a deal,” he wrote this week.

“Others include the disruption of supply chains, including the suspension of the delivery of nuclear material to the UK.”

This week, the manufacturers' lobbying organisation, EEF, urged the PM to drop her no deal, describing it as a “risky and expensive blow”.

Meanwhile, the former head of the Foreign Office has ridiculed the Prime Minister’s hopes of reaching a comprehensive trade deal within the two years of the Article 50 talks.