As in-fighting consumes the British Government, Europeans have stepped up quiet preparations for a possible collapse of Brexit talks that could see Britain crash out of the EU without a deal 18 months from now.

Key points: British PM Theresa May battles for job after party conference

British PM Theresa May battles for job after party conference EU diplomats brace for collapse in Brexit talks

EU diplomats brace for collapse in Brexit talks There are concerns in-fighting in British parliament will result in missed deadlines

Prime Minister Theresa May's EU counterparts still see the "no-deal scenario" she threatened them with as most unlikely, as they think it would hurt Britain much more than the continent.

But after her faltering party conference last week and ahead of important meetings in Brussels over the next fortnight, diplomats and officials there and in big member states said they have been putting renewed focus on contingency planning for a legal limbo in March 2019 and urging businesses to do the same.

German officials say that in recent months they have been spending just as much energy on how to handle that as on preparing for a negotiated solution.

The BDI industry federation in the biggest EU economy warned German firms on Thursday that it would be "naive" not to be ready for a "a very hard exit".

Ms May has urged the EU to show "leadership and flexibility" in unblocking stalled divorce talks, saying the ball was in the bloc's court.

But the EU lobbed the ball straight back, with European Commission spokesman Margaritis Schinas saying the responsibility for progress was "entirely in the UK court".

More than six months have passed since Britain triggered the two-year countdown to its EU exit.

A fifth round of divorce negotiations opened Monday in Brussels, with both sides frustrated by the lack of progress, and Ms May is due to update British politicians on developments since her major speech in Italy last month.

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'Be ready for all eventualities'

Like Ms May, who on Friday rejected calls from some politicians to resign, European Union negotiator Michel Barnier said his aim was an orderly exit.

But he repeatedly cautioned that he also had a mandate from EU leaders to help prepare for failure and he regularly tells businesses to be sure to plan for the worst.

"We want to be ready for all eventualities, including 'no deal'," he told business and labour representatives after the negotiations began in July.

Deal or no deal is "the fundamental question", he said, after talks made little progress in August.

"This is the growing feeling, absolutely," a senior EU official said of concerns that talks could collapse, not because Britain saw economic advantage in that, as Ms May has warned, but because British politics could end up in domestic stalemate that could mean missing reasonable deadlines for a withdrawal treaty.

For many, hints at a breakdown in talks remains part of the bluff and counter-bluff of negotiations.

But what Ms May's problems inside her own Government indicate to many across the channel is that the country is so divided it may be unable to reach a deal.

"You need to factor in that it's not a rational process," the senior EU official said, repeating a common view that voting for Brexit made no economic sense in the first place.

"So it's not unlikely that they again shy away from what are the economic imperatives and we end up cliff-edging by political default."

European Union's contingency plans

People close to Mr Barnier's negotiating team draw attention to new legislation last month aimed at protecting the EU carbon market from a disorderly British departure and moves to force euro-denominated securities clearing from London to the continent as examples of Brussels' contingency planning.

"It's the responsible approach. And the more it goes on like this, the more we'll see of these steps," said one EU official of the lack of clear breakthroughs in the talks.

Another senior official said: "There's every reason to be worried and European industry should take this more seriously."

Ms May's Brexit Minister, David Davis, is expected back in Brussels this week for a fifth round of negotiations with Mr Barnier.

Mr Davis and EU chief negotiator Michel Barnier during a fifth rounds of negotiations. ( Reuters: Francois Lenoir, file )

But expectations among EU officials are low to nil for a breakthrough on key divorce issues that would allow EU leaders to tell Ms May when they meet her next week that they are willing to open talks on a future free trade accord.

Aside from uncertainty over how a new EU border with Ireland will work and differences over rights for expatriates after Brexit, a standoff over tens of billions of euros that Brussels argues Britain will owe on departure seems far from resolution.

Describing as "unbelievable arrogance" Britain's offers to pay just 20 billion euros ($30 billion) of a "Brexit bill" which the EU estimates at perhaps 60 billion euros ($90 billion), a senior diplomat from a country Britain generally views as an ally in EU affairs said Ms May would have to face down hardliners who rejected such payments.

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Few of Britain's negotiating partners see any benefit in a change of prime minister now.

That would cost more time that neither side has, since the chances of London or Brussels agreeing to extend the Brexit deadline seem limited.

"With Boris Johnson as prime minister, the negotiations would be easier," one EU diplomat said of the foreign secretary, who has sniped at Ms May's push for a deal that could see Britain stay bound by some EU rules, at least for a transition period.

"We could save ourselves all this analysing as he'd just drive the talks straight off the cliff."

For many, ending with a legal void remains far-fetched.

But though British ministers talk of a "bespoke" deal to exit EU rules while retaining market access, EU officials warn that time is running out for London to find any option other than to agree to something like the status of Norway — being in the EU market and accepting rules on which it has no vote.

"Pretty soon," said one, "it will be Norway or nothing."

Reuters