Angela Merkel’s government has called for more realism from the UK in the ongoing trade and security talks, after the EU capitals were given a “sobering” update by Michel Barnier following the recent round of Brexit negotiations. After a presentation by the EU’s chief negotiator to ambassadors from the 27 member states on Friday, a spokesman for the German government, which holds the rolling EU presidency, said the bloc was ready to move negotiations quickly forward but “expressed the need for more realism in London”. The comments will be a blow to Downing Street, where it had been hoped the resolution of the EU’s internal budget and recovery fund debate would allow Merkel and the other leaders to intervene and unblock the negotiation following a month of little progress. “With the [budget] now wrapped up we hope member states will become more engaged in this process in Brussels and get them moving forward politically in a helpful way,” a UK source close to the negotiations said. The two sides completed their latest round of negotiations in London on Thursday without being able to agree on the basic outlines of a deal to reassure businesses about the future, which Boris Johnson had said in June should be possible. But despite publicly warning on Thursday that a deal by the end of the year appeared “unlikely” given the British position on fisheries and Brussels’ demands for a “level playing field”, sources said Barnier had not been overly pessimistic in his presentation on Friday. He warned the ambassadors that he believed negotiations needed to be wrapped up by the beginning of October due to the lengthy ratification process. Echoing the language recently used by the UK’s chief negotiator, David Frost, Barnier said that even if the deal on offer was “low quality”, as recently claimed by the British official, a “zero tariff, zero quota” agreement was a prize worth having. He added the EU would be open to revisiting some issues next year to strike separate agreements if the current negotiation was successful. The two main obstacles to a deal remain the access of European fishing fleets to British waters and arrangements to ensure neither side can undercut the other by lowering regulatory standards or unfairly subsidising industry. It is understood a number of the eight member states with the greatest interest in fishing access reiterated to the room of ambassadors that they would not agree to a deal without agreement on fisheries. Last week’s talks on fishing access focused on quota-sharing arrangements and the list of stocks for which shares need to be agreed. Barnier claimed the UK was effectively excluding European fleets from key stocks of fish in a move that risked destroying the bloc’s fishing industry. On level playing field clauses, both sides have agreed there should be a “non-regression” on labour, the environment and climate standards as they stand at the end of the transition period. The EU is demanding a “forward-looking” mechanism to ensure there is no regulatory undercutting in the future should the EU further develop its rulebook. There is a deadlock on state aid rules, with Brussels calling for the UK to publish its plans for controlling subsidies once the UK is outside the single market and customs union. Downing Street has so far appeared reluctant to respond to Barnier’s pressure, insisting its rulebook is wholly independent from the EU now the country has left the bloc. EU sources said there was concern in Brussels that interest in striking a deal was waning in London but that an agreement in September remained the most likely outcome given the economic damage of failure.