Brussels is said to have rejected Sir Keir Starmer's proposal to establish a single market for goods between the UK and EU in a major setback for Government's goal of improved relations.
The Cabinet Office's most senior official handling European relations, Michael Ellam, put forward the ambitious plan during recent trips to the Belgian capital as part of efforts to strengthen economic ties with the bloc.
However, EU counterparts proposed alternative arrangements - either a customs union or alignment through the European Economic Area (EEA) - both of which fall outside the boundaries the Prime Minister has set for negotiations.
The Prime Minister declared in 2024 that Britain would not rejoin the EU, single market or customs union during his lifetime, with EEA membership requiring free movement of people - another firm Labour red line.
Government sources disputed the characterisation that Brussels had definitively turned down the goods market proposal, insisting it remains among several options under consideration ahead of a summit provisionally scheduled for July 13.
Yet EU officials harbour deep reservations about crafting bespoke arrangements with Britain that might cause friction among the 27 member states.
There are concerns preferential treatment for the UK could encourage Eurosceptic candidates in France's 2027 presidential contest to argue for looser adherence to single market regulations.
One EU diplomat explained the bloc's position was rooted in self-interest: "If you start going back on those principles leading to a non-member being treated better than an actual member, you certainly would trigger an internal debate on the fundamentals of EU cooperation."
The Prime Minister declared in 2024 that Britain would not rejoin the EU, single market or customs union during his lifetime
|GETTY
Despite the setback on the goods market proposal, both parties continue working towards the summer summit with ambitions to finalise several agreements.
Negotiators hope to announce a veterinary deal that would simplify trade in food, drink and animal products, alongside an accord connecting their respective emissions trading schemes.
Breaking the impasse over a youth mobility programme also remains a priority - with all three commitments made at the previous EU-UK summit in 2025.
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A Cabinet Office spokesman said: "We are negotiating an ambitious package of measures with the EU ahead of the summit, including a food and drink SPS deal and emissions trading deal that, alone, are set to add up to £9bn a year to the UK economy by 2040."
However, the two sides have yet to settle on a forward-looking agenda for the summit.
Labour's current strategy faces obstacles similar to those which derailed Theresa May's 2018 Chequers plan, which had attempted to create a common rulebook for goods, while excluding free movement of people.
The political calendar may further complicate matters, with EU officials anticipating little movement from the Government on establishing a future agenda until after the Makerfield byelection in June, where Labour faces a threatening challenge from Reform.
EU officials harbour deep reservations about crafting bespoke arrangements with Britain
|GETTY
Andy Burnham, the Labour candidate widely expected to seek the party leadership should he win the seat, has pledged not to pursue EU re-entry and promised "a relentless domestic focus".
Earlier this month, Sir Keir sought to revive his premiership with a speech declaring Government would be defined by "putting Britain at the heart of Europe".
The strain comes amid further EU regulation chaos at Dover today, as the new entry-exit system - requiring people from non-EU countries to have their fingerprints registered and their photograph taken - resulted in five hour delays for motorists.
French border officials were forced to drop the new system this afternoon, with coastguard deployed to try and help delayed passengers from fainting in 28C heat.
Experts described the travel situation between the UK and mainland Europe as "a mess", with the checks made before travellers board a boat.