The economy could suddenly contract if Britain leaves the European Union without a deal - a prospect that has become more likely, Taoiseach Leo Varadkar has said.

The Irish economy is considered the most vulnerable to Brexit among remaining EU members.

This prompted the Government to set out two budget strategies for 2020 in yesterday's summer economic statement -including a no-deal Brexit scenario forecasting a potentially sharp return to a budget deficit to absorb the shock.

The Department of Finance reiterated its view that gross domestic product growth would fall to anywhere between zero and 1% in 2020 if Britain crashes out of the bloc later this year, rather than growing by the forecast 3.3% if it secures an orderly Brexit.

However, Mr Varadkar warned today it could be worse.

"In a no-deal hard Brexit - in which case we won't have to worry about the economy over-heating - it will slow down rapidly, even contract," he said at the National Economic Dialogue in Dublin Castle.

He also added that he would publish an updated no-deal contingency plan next month setting out further Government actions to be taken. 

A member of the ESRI, Martina Lawless, concurred, telling the conference that the no-deal damage "could be worse even than the worse case scenario being put forward" as forecasters do not know where additional disruptions might hit.

Mr Varadkar said a no-deal outcome would be particularly challenging for Northern Ireland, whose border and how it is managed in the future has proven the most contentious element of Brexit.

Meanwhile Minister for European Affairs Helen McEntee said the contested emergency "backstop" solution to prevent the return of border checks cannot be arbitrarily time-limited and must remain in place "as long as it is necessary, and no longer."

With Boris Johnson, the favourite to become British prime minister next month, advocating changing or abandoning the backstop, Ms McEntee said it remained to be seen how a new prime minister will actually address the issue after the "bluster" of the Conservative Party leadership campaign.

Leo Varadkar said he would also wait and see.

"I think we need to be conscious that there is a leadership contest under way. Very often rhetoric is used in campaigns, people campaign in poetry and they govern in prose so I'll see what the new prime minister has to say once they take up office," he said.

Mr Varadkar also said today that it would be Britain's decision if it leaves the European Union without a deal, not the EU's.

"It is always up to the United Kingdom to revoke Article 50 (of the EU's Lisbon Treaty to remain in the bloc) or to seek an extension for the purposes of a second referendum, if they decide to have one.

"No-deal will only ever be a British choice," Mr Varadkar said.

DUP leader Arlene Foster has said it is "very important" the UK leaves the EU by 31 October, but she refused to back either candidate to become the next British prime minister.

She told the Policy Exchange think tank in London that the British government must keep a no-deal Brexit on the table and claimed repeated extensions are fuelling public discontent.

Mr Johnson has pledged to leave by the Halloween deadline, but his rival, Jeremy Hunt, has left the option of an extension open.

Mr Hunt has accused Mr Johnson of making promises he cannot deliver over Brexit.

Mr Johnson has made a "do or die" promise to get the UK out of the EU by 31 October, but Mr Hunt has insisted he is "far more likely" to be able to deliver Brexit due to his skills as a negotiator.