* 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 UK fisheries lobby group)
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.
Both British Prime Minister Boris Johnson and the EU have
set a mid-October goal for reaching a trade agreement but the
EU's chief Brexit negotiator Michel Barnier suggested talks
would continue up until the end of the month.
There are still major hurdles to ensuring smooth ties after
Dec. 31, when a standstill post-Brexit transition ends, and a
chaotic split without a new agreement in place would jeopardize
an estimated trillion euros worth of annual trade.
"I can't announce a breakthrough," Merkel told a news
conference after two-day talks among the 27 national EU leaders
in Brussels. "As long as negotiations on Brexit are ongoing, I'm
optimistic."
Ireland's Prime Minister Micheal Martin told the summit
Britain must respect arrangements for the sensitive Irish border
it had agreed under its earlier divorce deal with the bloc as a
fraught week with scant progress towards a new trade deal ended.
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 Brexit divorce treaty.
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."
CRUNCH TIME
An EU source said EU negotiator Barnier also reported
progress but "a lot of open issues" when he briefed EU lawmakers
on the negotiations on Friday.
The source said Barnier named state aid and level playing
field guarantees of fair competition, fisheries, energy
procurement and carbon pricing among the sticking points.
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
compromise that would also include a "phasing-out" or
"transition" mechanism for fish quotas.
Under this idea, Britain would increase its quotas in time,
rather than overnight from Jan. 1, 2021, when it says it becomes
an "independent coastal nation" in control of its own waters.
"Some kind of transitional arrangement is one of the things
that are under discussion," said Barrie Deas, head of National
Federation of Fishermens' Organisations, a UK lobby group.
"The key point for us is that... we must have absolute
certainty at the end of this we have full access to the full
quota shares."
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.
The EU says an agreement must be at hand by November to
enable ratification 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 agreement.
Martin told his EU peers that adhering to Britain's EU
divorce bill provisions for Ireland 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 treaty, could threaten
the fragile peace on the island of Ireland.
U.S. special envoy for Northern Ireland said in London the
message he would take back to Washington was that all sides were
committed avoiding that.
(Additional reporting by Philip Blenkinsop in Brussels, Sabine
Siebold, Paul Carrel and Thomas Escritt in Berlin, Writing by
Gabriela Baczynska, Editing by Philippa Fletcher)