* Any deal must be in place by year-end
* Significant differences remain in trade talks
* Merkel signals tentative progress on fisheries
* Fragile peace on island of Ireland back in focus
(Adds detail on fisheries)
By Gabriela Baczynska and Elizabeth Piper
BRUSSELS/LONDON, Oct 2 (Reuters) - German Chancellor Angela
Merkel said she had no breakthrough to announce in EU talks with
Britain but remained optimistic on Friday that sealing a deal on
a new trade relationship after Brexit was still possible before
the end of the year.
With just two weeks before what both British Prime Minister
Boris Johnson and the EU have set as a deadline for reaching a
trade agreement, there are still major hurdles to ensuring
smooth ties after a standstill post-Brexit transition ends.
"I can't announce a breakthrough," Merkel told a news
conference after two days of talks among the 27 national EU
leaders in Brussels, including on Brexit. "As long as
negotiations on Brexit are ongoing, I'm optimistic."
Ireland's Prime Minister Micheal Martin said earlier on
Friday Britain must respect the Brexit arrangements it had
agreed with the bloc for the sensitive Irish border as a fraught
week with little progress towards a new trade deal wrapped up.
Johnson will speak to the head of the EU's executive, Ursula
von der Leyen, on Saturday to agree next steps after the bloc
launched a legal case against Britain over moving to undercut
their earlier divorce deal.
Speaking after the summit on Friday, von der Leyen said it
was time to "intensify" Brexit talks with time available by the
end of the year to put a new deal in place running out.
"Where there's a will, there's a way," she said.
"We have made progress on many, many difficult fields but
the main ones all remain very much open," she added, naming
guarantees on a level playing field of fair competition as a key
sticking point. "There is still a lot of work to do."
Referring to another major sticking point in the trade
talks, Merkel also said the UK's new deal on fisheries with
Norway announced this week "shows... agreements can be found".
The deal includes access to each other's waters, as well as
annual fishing quotas negotiations. The latter has long been
favoured by Britain but so far rejected by the EU, where
fisheries is politically sensitive for France.
But an EU diplomatic source said Merkel's comment suggests
that positions may be inching closer after the sides discussed a
potential compromise that would also include a "phasing-out
mechanism" for fish quotas.
Under this idea, Britain would increase its quotas in time,
rather than overnight from Jan. 1, 2021, when it has so far said
it would become an "independent coastal nation" with full
control of its own waters and who fishes in them.
With businesses increasingly concerned over what future
trading terms will be, U.S. Citi bank expected the two sides to
agree "a rudimentary Brexit deal" and JPMorgan agreed a deal was
more likely than not, though only a narrow one.
Martin told his EU peers earlier in the day that adhering to
Britain's EU divorce bill provisions on the sensitive Irish
border was crucial: "That is important in terms of trade,
protection of jobs," he said.
Ireland and the EU fear that the UK's new Internal Market
Bill, which Britain admits breaks the international law by
undercutting parts of its Brexit divorce deal, could threaten
the fragile peace on the island of Ireland.
U.S. special envoy for Northern Ireland Mick Mulvaney said
in London the message he would take back to Washington was that
all sides were committed avoiding that.
Beyond the border controversy, gaps in trade talks also
linger over ways to solve disputes. The sides will continue
negotiating until the EU leaders's next summit on Oct.15-16.
The EU says an agreement must be at hand by early November
to ensure time for the bloc to ratify it before the end of the
year. The bloc is adamant, however, that it would not implement
any new UK deal if London undercuts the divorce bill.
(Additional reporting by Philip Blenkinsop in Brussels, Sabine
Siebold, Paul Carrel and Thomas Escritt in Berlin, Writing by
Gabriela Baczynska, Editing by Philippa Fletcher)