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* UK, EU to hold intense negotiations
* Pound, UK-focused stocks surge
* Oct. 31 deadline nears
* Irish border key to deal
* Parliament could still stand in Johnson's way
(Adds DUP, Farage response)
By Gabriela Baczynska and Jonas Ekblom
BRUSSELS, Oct 11 (Reuters) - The European Union agreed on
Friday to enter intense talks with Britain to try to break the
deadlock over Brexit, lifting financial markets with a sign that
a deal could be done before the Halloween deadline.
A flurry of activity has brought the fraught bargaining
process to a new level as Britain's scheduled departure date of
Oct. 31 grows ever closer, but it is still uncertain whether the
two sides can make a breakthrough before then.
The move came at the end of a tumultuous week which started
with a public row between London and Brussels.
By Thursday British Prime Minister Boris Johnson and his
Irish counterpart Leo Varadkar said they had found "a pathway"
to a possible deal, and by Friday some officials were expressing
guarded optimism.
"I think both of us can see a pathway to a deal, but that
doesn't mean it's a done deal," Johnson said on Friday. "There's
a way to go, it's important now our negotiators on both sides
get into proper talks about how to sort this thing out."
Ireland is crucial if a deal is to be done to avert a
potentially disorderly Brexit that would hurt global growth,
roil financial markets and could even split the United Kingdom.
Dublin will have to consent to any solution to the toughest
problem of all: how to prevent the British province of Northern
Ireland from becoming a backdoor into the EU's markets without
having border controls.
A diplomat and an EU official said EU negotiator Michel
Barnier had told member states that Britain had changed its
position and now accepted that its proposed replacement of the
so-called "backstop" cannot involve a customs border between EU
member Ireland and Northern Ireland.
The backstop is an insurance policy that was designed to
ensure no customs or regulatory checks on the border between
Ireland and Northern Ireland after Brexit.
Separately, two senior EU diplomats told Reuters the
possible solution could include two elements: keeping Northern
Ireland inside the UK's customs regime while also carrying out
any customs and regulatory checks together.
Under a recent UK proposal, the regulatory border would run
down the Irish Sea between Northern Ireland and Britain. The
sources said they understood that customs checks could be
carried out there as well under the plan now under discussion.
But in a sign of the precarious nature of the talks, the
Democratic Unionist Party (DUP), the small Northern Irish party
which supports Johnson's government in parliament, warned it
would only compromise so far.
"The DUP has always indicated that the United Kingdom must
leave the EU as one nation and in so doing that no barriers to
trade are erected within the UK," leader Arlene Foster said,
without rejecting the proposal outright.
Johnson declined to give a direct answer when asked by
reporters if Northern Ireland would leave the EU customs union.
"LIKE CLIMBING A MOUNTAIN"
Barnier, who held "constructive" talks with Britain's Brexit
minister Stephen Barclay on Friday, said the Europeans would
take stock again on Monday.
Barnier told reporters as he left his meeting with Barclay:
"Brexit is like climbing a mountain. We need vigilance,
determination and patience."
Other EU officials agreed the challenge remained huge.
One European diplomat indicated to Reuters that there was
not too much hope on the EU side that a divorce deal could be
sealed before the end of the month.
"It's a tunnel with a very small light at the end of it," a
second diplomat said.
In Paris, French President Emmanuel Macron, asked by a
Reuters reporter if there was a "glimmer of hope" regarding a
Brexit agreement, replied: "Let us wait for the next few hours."
EU ministers convene in Luxembourg on Tuesday for a last
meeting before an EU summit next Thursday and Friday.
Johnson said there was still a long way to go and if
negotiators fail to reach agreement "then we have to be ready,
as this country is and will be, to come out with no deal if we
absolutely have to".
To get a deal done, he must also sell any deal to the
British parliament, which he suspended unlawfully last month and
where his Conservative Party has no majority.
Johnson, the face of the 2016 Brexit referendum campaign,
insists the country will leave on Oct. 31 with or without an
agreement but he has not explained how that will be possible
without defying parliament, which passed a law saying Britain
cannot leave the bloc without a deal.
Nigel Farage, the leader of the Brexit Party, showed the
challenge Johnson will face if he tries to move too far to
accommodate Brussels.
"I don't know what Boris Johnson has given away, but he
sounds very defensive," he said on Twitter. "Let us hope that
this is not a surrender."
The Brexit issue has deeply polarised the country and many
businesses fear they will be hit badly by a disorderly break
with the EU.
Big investment banks said on Friday they had become more
optimistic on the prospects for a deal, pushing sterling to a
three-month high, taking its rally since Thursday to more than
3%, its biggest two-day gain since mid-June 2016, before the
Brexit referendum.
Shares in companies exposed to Britain's economy also
surged, with Royal Bank of Scotland joining
housebuilders such as Persimmon, Barrett and
Taylor Wimpey in rising about 10%.
The yield on 10-year British government bonds was on track
for its biggest three-day rise since 2017.
(Additional reporting by Guy Faulconbridge, Costas Pitas,
Elizabeth Howcroft, Josephine Mason and David Milliken in
London, Amanda Ferguson in Belfast and Michel Rose in Paris,
Writing by Angus MacSwan and Kate Holton
Editing by Jon Boyle and Gareth Jones)
