The UK must "face the possibility" that it will not agree a deal on its future relationship with the EU by the end of the year.
Chief negotiator David Frost said that with less than six months to go until the end of the transition period, the UK must "continue preparing for all possible scenarios" for once that deadline passes.
In a statement after the latest round of talks in London, Mr Frost said "considerable gaps remain in the most difficult areas" - the so-called level playing field and fisheries.
But he said "despite all the difficulties" he still thought a deal could be reached in September.
EU negotiator Michel Barnier said the UK's current stances on a number of issues mean a deal at this point is "unlikely".
"Over the past few weeks the UK has not shown the same level of engagement and readiness to find solutions respecting the EU fundamental principles and interests," he said.
Britain left the EU at the end of January after 47 years of membership and is currently in an 11-month transition period, which sees it continue to follow the bloc's rules and regulations.
This time frame is being used to negotiate a free trade agreement and sort out the terms of the future relationship that will govern ties between the UK and the EU in the future.
Prime Minister Boris Johnson has insisted he will not extend the Brexit transition period beyond the end of this year, despite warnings that disruption caused by the coronavirus pandemic has made striking a deal impossible.