Senior Tory donors have warned that Theresa May should walk away from Brexit talks rather than accept an “unsatisfactory and unfavourable deal” that would poison relations with Europe for another generation.

In a sign of growing frustration among pro-Brexit Tories over the lack of progress made in talks with Brussels, one donor said he feared some pro-Remain cabinet ministers were suffering from “Stockholm syndrome” – when hostages develop a bond with their captors.

The calls for May to be prepared to walk away comes amid new warnings that a “no deal” outcome will lead to foreign firms leaving, steep price rises, widespread job losses and disaster for the Irish economy.

In submissions to a parliamentary inquiry seen by the Observer, retailers, the City, universities, the freight industry, overseas investors and food suppliers all sound the alarm over the consequences of crashing out. However, some Tory Brexiters are concerned at the slow pace of negotiations and want the option of walking away to be a viable one.

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Michael Farmer, a Tory peer and former party treasurer who has given millions to the Conservatives and the Leave campaign, told the Observer that former prime minister David Cameron’s failure to secure major concessions over Britain’s EU membership before last year’s referendum showed the dangers of accepting a bad deal.

“It is worth recalling the paltry offer that Cameron came back with from Europe at the beginning of last year, which was an important factor in persuading people to vote out,” he said. “If another unsatisfactory and unfavourable deal is done with the EU negotiators, the exasperating and divisive issue of Europe will not go away but smoulder on for another generation.

“No deal would free us – and challenge us – to rise to and take advantage of the many opportunities that would become open to Britain.”

Jeremy Hosking, the Vote Leave and Conservative donor who also ran his own Brexit Express campaign, said that “robust no-deal contingency planning” was essential in light of the EU’s refusal to move on to trade talks.

“The EU is stonewalling on the divorce bill, increasing intolerably the political pressure on Mrs May, and we still have no idea whether the trade deal will be beneficial to the UK, or whether they will kick us further in the teeth when we are down,” he said. “Maybe our EU friends will squeeze us on trade as well as on alimony? They have repeatedly said that Brexit must be bad for us. Maybe our own Remainers will cajole us into a high exit fee and an disadvantageous trade deal? It’s not apparent in the Brexit context that our European partners wish us well.

“Clearly we are now in a vulnerable position and some members of our own team, including cabinet ministers, appear to be keen to increase our fragility. Is it any wonder that talk of Brexit sabotage stalks the land? One is reminded of Stockholm syndrome.”

David Lilley, another major donor to the Conservatives and Vote Leave, said it was vital that the “no-deal” option be left on the table: “Why would there be any motivation for the EU to give any deal concession if they know that we can’t walk away?

“The only people who should logically take the position of seeking to make the UK unable to reject unfavourable and punitive terms are those who are negotiating for the EU. It would not be a logical position for anyone who has the UK’s best interest at heart.”

The prime minister now faces a delicate decision over whether or not to publish more details of the government’s preparations for a “no deal” Brexit. While it could show Brussels that the idea is being treated as a serious option, some in Whitehall fear it could backfire by highlighting the big difficulties created by leaving with no agreement.

It comes as new economic modelling by the European parliament suggests that a “no deal” Brexit would increase UK consumer prices by 4% in 2030 and wipe 2.4% off the UK’s GDP. Ireland’s economy would be hit even more severely.

A series of submissions to the Lords EU committee’s inquiry into the no-deal option outline serious concerns from several sectors. The British Retail Consortium states that the average tariff on food products imported from the EU would be 22%, with tariffs on Irish cheddar as high as 44% and beef up to 40%.

Financial sector advocacy group TheCityUK warns that EU-related financial services activity, worth about £18bn-20bn, could be at risk, along with up to 35,000 jobs. The London First business group said companies had been forced to put investment and recruitment decisions on hold and revise their supply chains or were seeing “reduced demand for products and services”.

GuildHE, one of the representative bodies for higher education, said that a “tough immigration policy in the event of no deal ... could put our institutions at risk of not continuing to compete successfully in a global field”.

The American Chambers of Commerce to the EU said leaving with no deal would have “potentially devastating consequences”. It added: “Companies would subsequently be forced to make difficult decisions regarding their investments and trading arrangements.”

The Department for Exiting the European Union said: “We are approaching these negotiations in a constructive way and in a spirit of friendship and cooperation. We want a deep and special partnership and believe it is in everyone’s interest to discuss this. We are optimistic about achieving this, but it is the duty of a responsible government to plan for a range of scenarios.”