Boris Johnson told ministers that failing to reach a post-Brexit trade deal with the European Union should hold "no fear" for the UK.
The Prime Minister, who wants to know if a deal is possible by Thursday's summit of European Union leaders, told the Cabinet that the talks were at a crucial stage.
Meanwhile, a minister accused businesses of adopting a "head-in-the-sand approach" ahead of the UK's exit from the single market and customs union at the end of the year.
The Prime Minister told Cabinet that he still believes a trade deal can be done, his official spokesman said.
"The PM reiterated that, while we want a deal on the right terms, if we can't get there we are ready and willing to move forward with an Australian-style outcome, which holds no fear," the spokesman said.
Australia has no comprehensive trade deal with the EU, but also does far less business with the bloc than the UK.
Michel Barnier, the EU's lead negotiator, updated ministers from the 27 member states at a meeting in Luxembourg ahead of this week's European Council summit.
Michael Roth, Germany's Europe minister, suggested the UK would have to give further ground on fishing rights, "level playing field" arrangements such as state subsidies, and the way any deal would be governed.
At the General Affairs Council (GAC) meeting, Mr Roth said: "Frankly speaking, we are at a very critical stage in the negotiations. We are extremely under pressure, time is running out.
"That's why we expect substantial progress by our friends from the UK in key areas."
Mr Roth added: "We are well-prepared for both scenarios, everybody should know that a no-deal scenario is the worst case, not just for the European Union but also for the United Kingdom, but we are also prepared for that.
"But we are working very hard on a good deal, on a sustainable deal which is acceptable for both sides."
Mr Barnier suggested that talks would go on beyond Mr Johnson's October 15 deadline.
"The EU will continue to work for a fair deal in the coming days and weeks," he said.
Lord Frost, Mr Johnson's Europe adviser, will be taking part in negotiations in Brussels until the eve of the summit.
European Commission vice-president Maros Sefcovic, who has been leading talks with Michael Gove on the implementation of the Brexit divorce deal, said: "EU unity is solid. We continue: full attention, full speed in this final stage."
In the UK, Government minister Lord Agnew warned that businesses were not ready for the changes that will come in on January 1 when the country leaves the single market and customs union.
He told the Treasury Select Committee: "There's been a head-in-the-sand approach by traders which has been compounded by what I would call the quadruple-whammy of two false alarms – two extensions at the very last minute – then followed by Covid and now followed by the recession.
"The traders are not as ready as they should be."
The comments prompted a backlash from business groups.
Confederation of British Industry deputy director-general Josh Hardie said: "Businesses are doing all they can to prepare for Brexit. But firms face a hat-trick of unprecedented challenges: rebuilding from the first wave of Covid-19, dealing with the resurgence of the virus and uncertainty over the UK's trading relationship with the EU.
"More than three-quarters of businesses want a deal that will support people's jobs and livelihoods amid these incredibly uncertain times.
"The best way to help preparations is to agree a deal in the coming weeks."
Logistics UK policy director Elizabeth de Jong said: "Instead of spending the next 11 weeks before the end of the transition period debating who and what is or isn't ready, Logistics UK is proactively working with Government on a series of metrics to assess readiness, so that Government and industry can be as confident as possible that all is on track for a smooth transition to a new trading arrangement with the EU.
"Despite the challenges our members are facing to cope with the Covid-19 pandemic and the festive season, traditionally our busiest time of year, we stand ready to help keep Britain trading as we always do."