* EU says UK has broken trust, tells it to back down
* UK refuses to blink: We're pressing ahead, London says
* France says violating treaty would be unacceptable
* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
(Adds Goldman Sachs, Gove and Pelosi, edits headline)
By William James and Gabriela Baczynska
LONDON/BRUSSELS, Sept 10 (Reuters) - The European Union told
Britain on Thursday it should urgently scrap a plan to break
their divorce treaty, but Prime Minister Boris Johnson's
government refused and pressed ahead with a draft law that could
sink four years of Brexit talks.
With chances growing of a messy end to Britain's departure
from the EU, the European Commission said London would be
committing "an extremely serious violation" of last year's
Withdrawal Agreement if it went ahead with proposed legislation.
After emergency talks between Commission Vice President
Maros Sefcovic and Britain's Brexit supremo Michael Gove, the EU
said Britain's proposal had "seriously damaged trust" which
London must now take steps to re-establish.
Gove, one of Johnson's most senior ministers, said he
refused the EU's request to scrap the draft legislation.
"I explained to Vice President Sefcovic that we could not
and would not do that," Gove said.
EU diplomats and officials said the bloc could use the
Withdrawal Agreement to take legal action against Britain,
though there would be no resolution before the end-of-year
deadline for Britain's full exit from a transition period.
The British government says it is committed to the treaty
and that a proposed law overriding parts of the Withdrawal
Agreement merely clarifies ambiguities. Its main priority, it
says, is the 1998 Northern Irish peace deal that ended decades
of violence.
French Foreign Minister Jean-Yves Le Drian told his British
counterpart Dominic Raab a violation of the Withdrawal Agreement
with the EU would be "unacceptable", a spokeswoman said.
Europe's leaders have been handed an ultimatum: accept the
treaty breach or prepare for a messy divorce that could sow
chaos through supply chains across Europe and spook global
financial markets.
Britain signed the treaty and formally left the EU in
January after more than three years of crises and wrangling over
Brexit. But it is a member in everything but name until the end
of the year when a transition agreement expires.
The pound fell against the dollar and the euro and the FTSE
100 share index fell. European Central Bank chief Christine
Lagarde said she was monitoring Brexit developments.
BREXIT ULTIMATUM
European diplomats said Britain was playing a game of Brexit
"chicken", threatening to wreck the process and challenging
Brussels to change course. Some fear Johnson views a no-deal
exit as a useful distraction from the coronavirus pandemic.
One EU source said Britain would not succeed if it tried to
use the planned breach of the Withdrawal Agreement as a threat
to extract concessions from the bloc in trade talks.
"If they try to do that, it will fail," the EU source said.
Goldman Sachs said it expected "the perceived probability of
a breakdown in negotiations to escalate over the coming weeks,"
but its base case remains a "thin" free trade agreement that
steers both sides back from the brink.
Without a trade agreement, nearly $1 trillion in trade
between the EU and Britain could be thrown into confusion at the
start of 2021, compounding the economic impact of the
coronavirus pandemic.
But Britain is pressing one of the EU’s most sensitive
buttons - fear that a post-Brexit Britain could become a much
more deregulated free-market competitor with access to EU
markets by using selective state aid.
The latest dispute centres on rules for Northern Ireland,
which shares a land border with EU member Ireland, because under
the divorce deal it remains within the EU's orbit - a
restriction Britain wants to remove.
Britain again on Thursday openly admitted it was ready to
breach international law. Former British leaders Theresa May and
John Major scolded Johnson for considering an intentional breach
of international law.
U.S. House of Representatives Speaker Nancy Pelosi said
Britain would not get a trade deal with the United States if it
did anything to undermine the 1998 Northern Irish peace
agreement.
"This news comes to us... that the UK had decided to
undermine the Good Friday Accords. What were they thinking?" she
told reporters in Washington. "Whatever it is, I hope they're
not thinking of a UK-U.S. bilateral trade agreement to make up
for what they might lose."
(Writing by Guy Faulconbridge; Additional reporting by
Elizabeth Piper, Michael Holden, Andy Bruce and Olga Cotaga in
London, Padraic Halpin in Dublin and John Chalmers in Brussels;
Editing by Catherine Evans and Janet Lawrence)