Brussels' chief Brexit negotiator has said a transitional arrangement with Britain may be necessary, must be limited in time and subjected to EU laws.
Appearing before a European Parliament committee, Michel Barnier outlined the European Commission's conditions for a Brexit deal.
He said the EU agrees with Prime Minister Teresa May’s desire to have a bold and ambitious free trade agreement.
But he said there can be no a la carte participation in the single market.
There should be continued EU-British cooperation on security and defence and that security cannot be a bargaining chip on trade talks, he added.
Britain must reach a deal on what it owes the EU before talks can start on a post-Brexit trade deal, he also said.
"When a country leaves the union there is no punishment, there is no price to pay to leave. But we must settle the accounts, no more, no less," he said.
European Council president Donald Tusk is due to publish guidelines for the EU's response to Brexit within 48 hours of receiving the historic Article 50 letter on 29 March formally informing him of the UK's intention to leave.
Leaders of the remaining 27 EU states will gather in Brussels on 29 April to agree a negotiating mandate for Mr Barnier, allowing talks to begin in earnest in May.
A leaked version of the Tusk guidelines obtained by Dutch newspaper De Volkskrant suggested Brussels is ready to take Britain to the International Court of Justice in The Hague if Mrs May refuses to pay a "divorce bill" reported to reach as much as €60bn.
The newspaper quoted an unnamed EU official as saying: "In that case it is, see you in The Hague."
Also featuring in the leaked draft were:
- Insistence that access to the European single market is conditional on observing the EU's "four freedoms", including the freedom of movement of people to work and settle.
- Reciprocal arrangements for EU nationals living in the UK and Britons on the continent to retain their residence rights.
- A requirement for Britain to lose some of its trading advantages as the price of giving up EU membership.