Donald Tusk has insisted the EU “does not want to build a wall”, but Brexit means “we will be drifting apart”.
The EU Council president said his side would be “open, positive but with realism” in upcoming talks with the UK over post-Brexit relations.
He spoke as he unveiled draft guidelines on what the EU wants to achieve from the talks.
Mr Tusk said he wanted continued security and research cooperation and to ensure flights were not grounded.
On trade, he said that the UK’s decision to rule out membership of the single market or the customs union meant a free trade agreement was the best option – but it would be, he said, the first such agreement that would “loosen, not strengthen economic ties”.
EU deal ‘must include financial services’
Kamal Ahmed: Hammond’s hidden message
The leaders of the remaining 27 EU states must approve the plans at a Brussels summit on 22 March, setting the template for chief negotiator Michel Barnier for talks with the UK about their future relationship.
The UK is due to leave the EU at the end of March 2019, and both sides have said they would like a deal on their future relationship to be agreed by this autumn to allow time for parliaments to approve the deal before Brexit happens.
The draft guidelines say existing fishing rights for EU vessels in UK waters will continue.
And the document says there must be limits on how deep a free trade agreement on services should be and it should include “ambitious” provisions on free movement of people.
The document says the “four freedoms” of the single market – the free flow of goods, services, money and people – are “indivisible” and “there can be no “cherry picking” through participation based on a sector-by-sector approach, that would undermine the integrity and proper functioning of the single market”.
MPs to debate Plaid’s EU citizenship call
Brexit: All you need to know
But the European Council “confirms its readiness to initiate work towards a free trade agreement (FTA), to be finalised and concluded once the UK is no longer a member state”.
It adds: “Such an agreement cannot offer the same benefits as membership and cannot amount to participation in the single market or parts thereof.”
It comes as Chancellor Philip Hammond calls for financial services to be included in any future trade agreement.
The EU’s chief Brexit negotiator, Michel Barnier, has argued that such a deal had never been done before.
But Mr Hammond will say in a speech that the EU has in the past attempted similar agreements, such as in trade talks with the US and Canada.
“If it could be done with Canada or the USA… it could be done with the UK,” he will say.
“I am clear not only that it is possible to include financial services within a trade deal but that it is very much in our mutual interest to do so.”
The EU draft guidelines contain no mention of financial services.
The BBC’s Economics Editor Kamal Ahmed said the two sides appeared far apart but most people involved in the talks thought a deal was possible.
The European Parliament’s Guy Verhofstadt held talks on Tuesday in Downing Street
The European Parliament has stressed that its preferred option is for the UK to continue to be a member of the single market and customs union after Brexit, in a draft resolution, leaked to the Politico website.
The parliament does not have a formal role in the Brexit negotiations but does have a veto on the final deal.
The European Parliament document, which may be changed before it is adopted, says non-EU members – even if very closely aligned to the bloc – cannot expect the same rights and benefits as EU members.
It also warns that the UK’s current “red lines” in Brexit talks “would lead to customs checks and verification which would affect global supply chains and manufacturing processes, even if tariff barriers can be avoided”.
Verhofstadt wants 100% rights guarantee
It says a “deep and comprehensive” trade deal, of the kind envisioned by Theresa May, must entail “a binding interpretation role” for the European Court of Justice.
BBC Brussels Correspondent Adam Fleming said the draft will look like a rejection of the speech Theresa May delivered on Friday setting out her vision of post-Brexit trade, but with some “wriggle room” and the possibility of much more if the UK softens some of its red lines.
MPs in Westminster are, meanwhile, set to debate a Plaid Cymru call for UK nationals to be allowed to keep their EU citizenship after Brexit.
Plaid said EU citizenship would give holders the right to travel, live, study and work anywhere in the EU even after the UK leaves next year.
A UK government spokesman said only citizens of EU member states could hold EU citizenship.