The Brexit talks will enter their final act on Saturday with a shift to direct negotiations between Boris Johnson and the European commission president, Ursula von der Leyen, following the failure to find agreement in London. In a joint statement, David Frost, the UK’s chief negotiator, and his EU counterpart, Michel Barnier, said they had not been able to come to terms on the final issues and that the historic trade and security negotiation would be paused. The year-long negotiation had long been expected to end with arbitration between the two political leaders, although there remains no certainty that an acceptable compromise will be found. “After one week of intense negotiations in London, the two chief negotiators agreed today that the conditions for an agreement are not met, due to significant divergences on level playing field, governance and fisheries,” Barnier and Frost said in the statement. “On this basis, they agreed to pause the talks in order to brief their principals on the state of play of the negotiations. President Von der Leyen and prime minister Johnson will discuss the state of play tomorrow afternoon.” It is understood Johnson and Von der Leyen will talk by phone on Saturday afternoon. It is believed that a major bone of contention for the UK side is Brussels’ intention to exempt all EU funding from the future state aid rules, a contentious move raised by one of Frost’s deputy negotiators some weeks ago but which has yet to be resolved. EU sources were swift to reject claims from Downing Street, which were briefed to some newspapers, that a demand for a 10-year transition period for phasing in changes for European fishing fleets was an obstacle to a deal. “The UK wants a short transition, we have asked for a much longer one. There is a middle way – and that is not the cause of any problem,” a source said. Earlier in the day the German chancellor, Angela Merkel, stepped in to urge both sides negotiating in London to move past their red lines to strike a deal, even as the French government said it could wield its veto if the deal failed to match expectations. Despite concerns being raised in Paris, The Hague, Copenhagen and Rome about the concessions already offered by Barnier, Merkel’s government said that further compromise should be made if it would secure a trade and security deal. Merkel’s spokesman, Steffen Seibert, said: “For the chancellor, and that hasn’t changed in recent weeks, the willingness to compromise is needed on both sides. If you want to have a deal then both sides need to move towards each other. Everybody has their principles, there are red lines, that’s clear, but there’s always room for compromise.” Sources said both Merkel and Von der Leyen had shown “absolute determination” to push the deal over the line despite the concerns of some over the detail. “The member states will take their time when they get the deal through,” said one diplomat. “Agreement at negotiator level doesn’t necessarily mean it is a deal.” No 10 is keen to secure an agreement in time for legislation implementing the deal to pass through both houses of parliament before Christmas. Government officials acknowledge they may have to ask MPs to sit until 23 December if a deal comes later than the start of next week. On Friday, the European council president, Charles Michel, promised the member states they would have sufficient time to scrutinise any terms settled between the negotiating teams. But the former Belgian prime minister said both sides had a responsibility to make the talks work. “We’ll see in the next two days what the next steps are at this point in the negotiations,” he said. “It will be up to the commission to take a position, and when the time comes, and the time has not yet come, it’ll be up to the member states to take a position as well. ” Earlier in the day, Clément Beaune, France’s European affairs minister and a close ally of President Emmanuel Macron, said his country could act unilaterally if the terms were not right. “I think it’s also the case for our partners that if there were a deal that isn’t good, which in our evaluation doesn’t correspond to those interests, we will oppose it,” Beaune said. “Yes, each country has a veto, so it’s possible. France like all its partners has the means of a veto. We must make our own evaluation of course of this deal, that’s normal. We owe that to the French people, we owe it to our fishermen, and to other economic sectors. “I want to believe we will have a good deal, but to get a good deal, you know, it’s better to be frank and to say our interests. We have been very clear, sometimes the Brits a little less so, about our interests.” A No 10 spokesman had earlier reiterated the UK government’s insistence on protecting “sovereignty”. “There are still some issues to overcome. Time is in very short supply, and we’re at a very difficult point in the talks,” the spokesman said. “What is certain is that we will not be able to agree a deal that doesn’t represent our fundamental principles on sovereignty and taking back control. That includes controlling our borders, deciding on a robust and principled subsidy control system, and controlling our fishing waters.” The details of any deal will be scrutinised closely by pro-Brexit MPs, whose support carried Johnson into Downing Street. They say they will not wave through an agreement that cedes too much regulatory control to Brussels. A senior Tory MP in the European Research Group said: “I think it’s more likely than not that we will have a deal by Monday. I’m cautiously optimistic about it, subject to the detail – the devil is in the detail. “As far as fisheries are concerned, everybody would have to be satisfied that the fishing industry was happy with the deal. On state subsidies, anything that left us permanently tied to EU regulation would not be acceptable. But I have every confidence the British negotiators are aware of that and are approaching the talks with that in mind.” With Labour likely to back an agreement and Johnson sitting on a comfortable majority, it is almost certain to pass, even in the face of a significant Tory rebellion. UK government sources had claimed on Thursday that the negotiations had taken a sudden step backwards after furious French lobbying pushed the EU to make late demands. The apparent hardening of the EU position was said to have destabilised the protracted talks, undoing progress made over the previous 24 hours. Both sides believe Sunday evening or Monday morning is the deadline for the year-long negotiation. Beaune said the risk of a no-deal Brexit remained. “We mustn’t hide it because there are businesses, our fishermen, citizens who need to know and so we must prepare for a risk of no deal. That’s to say on 31 December there will be no more free circulation, and free access to the UK market and vice versa. “But it’s not what we want … I still hope we can have a deal but I also say to our fishermen, to our producers, to our citizens, that we won’t accept a bad deal.” The talks remain focused on the level of access EU fishing boats will be given to British waters at the end of the year and the “level playing field” provisions. The EU is seeking assurances that the UK will not be able to distort trade through subsidies or by undercutting on environmental, labour and social standards.