LONDON/BRUSSELS (REUTERS) - The European Union stepped up planning for a "no-deal" Brexit on Friday (Sept 11) after Prime Minister Boris Johnson's government refused to revoke an ultimatum on breaking the divorce treaty that Brussels says will sink four years of talks.

Britain said explicitly this week that it plans to break international law by breaching parts of the Withdrawal Agreement treaty that it signed in January, when it formally left the bloc.

Britain says the move is aimed at clarifying ambiguities, but it caused a new crisis in talks less than four months before the United Kingdom is due to complete its departure from the EU's orbit when a transition period ends in December.

The EU has demanded that Britain scrap the plan to breach the divorce treaty by the end of this month. Britain has refused, saying its Parliament is sovereign above international law.

"As the United Kingdom looks to what kind of future trade relationship it wants with the European Union, a prerequisite for that is honouring agreements that are already in place," said Mr Paschal Donohoe, chairman of euro zone finance ministers.

"It is imperative that the government of the United Kingdom respond back to the call from the (European) Commission."

EU chief negotiator Michel Barnier said on Thursday, after talks in London, that the bloc was increasing its planning for a no-deal Brexit at the end of this year after trade talks made little progress.

"The UK has not engaged in a reciprocal way on fundamental EU principles and interests," Mr Barnier said. "Nobody should underestimate the practical, economic and social consequences of a 'no deal' scenario."

Britain, though, rejects the suggestion by the European Union that it has not engaged with Brussels, a British source said on Friday.

"We don't recognise the suggestion that we've not engaged, we've been engaged in talks pretty consistently for many months now," said the source, on condition of anonymity.

"The problem is the EU seems to define engagement as accepting large elements of their position rather than being engaged in discussions."

The UK source said Britain had proposed "robust, open and fair" guarantees for a level-playing field on competition, and said it was "baffled" by suggestions that it had not engaged on other issues such as dispute settlements and law enforcement.

The EU on Friday said it will consider its next steps with Britain after the end-September deadline it has set for London to scrap a plan to breach the terms of its withdrawal agreement.

"We have set a deadline for the UK and therefore... we are going to take this step by step," European Commission spokesman Eric Mamer told a news briefing.

Investment banks have increased their estimates of the chances of a messy end to Britain's divorce from the trading and political bloc it first joined in 1973, and sterling has fallen against the dollar and the euro.

European Commission Vice-President Maros Sefcovic urged Britain to scrap by the end of September the main elements of new legislation put forward this week that would override parts of the Withdrawal Agreement, but Britain said Parliament would debate the Bill on Monday.

The Bill will face opposition in both houses of Parliament, as many senior British politicians have expressed shock that London is explicitly planning to breach international law.

"The government will have to think again," said Mr Norman Lamont, a Brexit-supporting member of the House of Lords, the upper chamber, who was finance minister when the pound crashed out of the Exchange Rate Mechanism in 1992.

"I don't think this will get through the Lords, in its present form," he said. "It is impossible to defend. They'll have to think again."

Mr Barnier's team will brief the 27 members of the EU on the progress of trade talks on Friday.