Brexit negotiations are heading for a catastrophic breakdown unless the European Union signals this week that it will allow talks to move on to trade, according to a person familiar with the U.K. government's position.

Without a clear sign that negotiations will progress to trade and transition arrangements by December at this week's summit of European leaders, the entire Brexit process will be in danger of collapse—and senior British ministers are losing faith in the EU's willingness to strike a deal, the person said.

Speaking on condition of anonymity, the person said Theresa May took a political risk by promising to pay into the EU budget and settle the divorce bill in a speech in Florence, Italy, last month and now needs something in return before she can make further concessions.