EU leaders are set to strip Britain of major European agencies regarded as the bloc’s crown jewels in the early stages of the Brexit negotiations, reports say.

According to The Observer, diplomats on the continent agreed at a gathering last week that the European Banking Authority and the European Medicines Agency are to be relocated from London to another city in the bloc.

It comes as the British Government prepares to enter Brexit negotiations next month after Theresa May invoked Article 50 of the Libson treaty – triggering the divorce process – in late March.

But one EU source told the newspaper that initial sympathy with Britain’s decision to leave the bloc had eroded due to the UK Government’s aggressive approach to talks – including the threat of leaving the negotiations without a deal and becoming a low-tax haven.

The European Banking Authority, established in 2011, is an independent EU authority that regulates and supervises the continent’s banking sector and, combined with the European Medicines Agency, employs around 1,000 people.

In March Adam Farkas, the EBA’s executive director, said Brexit was a “major talking point among the staff” stationed at its London headquarters. “The outcome of the referendum, which will likely lead to a removal of the EBA from London, is having a major impact,” he added.

The European Medicines Agency began operating in 1995 and is responsible for the “scientific evaluation, supervision and safety monitoring of medicines developed by pharmaceutical companies for use in the EU”.

It boasts 900 highly skilled staff and will undoubtedly create a bidding war between the EU’s member states over where its headquarters are relocated.

SNP pressure Theresa May for 'compromise UK-wide approach' to Brexit negotiations

“Of course, we want to protect trade with Britain, but maintaining the single market, keeping trade flowing there, is the priority, and so we will work through [the EU’s chief negotiator] Michel Barnier,” a source said. “Britain used to be pragmatic. That doesn’t seem to be the case any more, and we need to protect our interests.”

It is also expected the EU will formally reject Ms May’s plea for early trade talks, running parallel with the divorce settlement. This comes after Angela Merkel, the German Chancellor, dealt an instant blow to the Prime Minister’s Brexit plans by rejecting such a plan. Britain will now be put into the slow lane for discussions about any future trade deal.

Ms May had called for negotiations on a future comprehensive trade deal between the EU and UK to take place at the same time as talks on how Britain will exit the bloc.

In her letter triggering Article 50 Ms May said she believed it "is necessary to agree the terms of our future partnership alongside those of our withdrawal from the European Union". She repeated similar sentiments four times in the documents.

Shadow Brexit Secretary Sir Keir Starmer told the newspaper it was “deeply concerning” that Ms May is “now isolated from our EU partners” as the Brexit negotiations get under way. “I have emphasised in Parliament on a number of occasions that the tone adopted so far by the Government is unlikely to get the talks off to a good start,” he said.