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Angela Merkel has said she still believes it is possible for the two sides to broker an agreement in the coming weeks. She made the comments during a meeting of the Union parliamentary group in the Bundestag, the German Parliament.
But the German leader did acknowledge the negotiations were still deadlocked, with a number of areas still to be resolved.
The major stumbling blocks are over fishing rights and common standards.
Time is running out for the two sides to agree a deal, as both the UK and Brussels need sufficient time to ratify an agreement in their respective Parliament’s.
The EU has said the latest talks can extend to is December 10.
The talks were initially meant to have concluded by the end of October, prompting Boris Johnson to temporarily walk away from the negotiations.
Yesterday, the Prime Minister briefed his cabinet on the latest progress, and said he remained “keen” to get an agreement but would not comprise on the UK’s “core principles”.
The Prime Minister’s official spokesman said: “The PM said that his position hasn’t changed: the UK is keen to secure a deal with the EU, but not at the cost of our core principles around sovereignty and control over our laws, borders, money – and our fish.
“Significant issues remain, particularly on the so-called level playing field and fisheries.
JUST IN: ‘Walk away now!’ Britons furious at EU’s refusal to accept UK fishing
“We are working hard to find solutions which fully respect UK sovereignty, but it is far from certain that an agreement will prove possible and time is now very short.
“The PM said that, if we cannot find suitable compromises with our European friends, we will leave the transition period on Australia terms on January 1.
“The PM said he was incredibly confident that the UK will thrive with or without a free trade agreement with the EU.”
A breakthrough is expected to take place this week.
EU will turn to no-deal Brexit ‘within days’ in angry reaction to talk [INSIGHT]
Boris Johnson told to copy Norway in fishing allocation [DETAILS]
EU trade deal ‘far from certain’ says Boris as he defies Brussels [COMMENT]
Michel Barnier, the EU’s chief Brexit negotiator will brief EU ambassadors on Friday on whether he believes a deal with Britain is possible.
If he indicates a deal is within reach, Brussels are likely to give him more time to negotiate.
But if no movement is seen on battleground areas, such as fishing rights and common standards, the talks could be pulled.
Mr Johnson has repeatedly warned the UK will not surrender to the EU’s demands to give up huge access to fishing waters.
The Prime Minister is also under pressure to stand firm against EU demands for the same fishing rights as the bloc has now.
Industry organisations warned any late concessions to Brussels would never be reclaimed, adding: “We urge you to hold firm.”
Additional reporting by Monika Pallenberg.
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