It is not acceptable to alter EU rules on the free movement of people during any Brexit transition, the European Parliament's co-ordinator on Brexit has warned.
Guy Verhofstadt argued it would be "penalising citizens" to continue without change in the areas of goods and financial services, but alter freedom of movement rules.
The EU he said was "very worried" about the issue of citizens' rights.
He said he anticipated that if any deal was voted down by the UK Parliament there would be a "crisis in British politics" and maybe a new Government and a new position on Brexit, branding it "unknown territory".
Speaking on BBC One's The Andrew Marr Show, Mr Verhofstadt said: "What we want as a European Parliament is an association agreement and in this association agreement there will be a free trade deal inside."
He added that he wanted to see Britain remain in the single market, be a member of the European Economic Area and a member of a customs union.
Transition he argued would be the continuation of the "existing rules, the existing policies without having a say".
The EU he said was "not against" a transition period and it was "even necessary" to discuss and negotiate a future relationship, adding: "It's normal that in a transition, you simply continue the existing rules and the existing policies."
Mr Verhofstadt said it was not acceptable to alter free movement of people rules during any Brexit transition, warning it would be "penalising citizens".
He said: "It's not acceptable for us that rules will continue without change for financial services, for goods, for whatever other business and only for the citizens their situation will change. That is penalising citizens."
He added it would be possible by March 2019 to agree a withdrawal agreement, a transition period and an annex, a political declaration, describing a future relationship between Britain and the EU.
On Britain's aims for a special bespoke arrangement for financial services, the MEP stressed the necessity of a "level playing field".
He warned: "What we don't want is that with this whole agreement we establish a type of financial centre that is competing with the Continent not in a serious way by every time lowering taxes, lowering the type of rules so that we create a competitive disadvantage."
He added: "There has to be a level playing field in this and no competitive advantage, neither for the Europeans and not for the British."
Mr Verhofstadt said the EU understood Britain wanted to diverge in a number of fields and regain its sovereignty, but added it would have to take the "consequences" of it.
He said: "Everything is depending on the red lines of the British side. I say single market is the best solution for the British industry and the British economy, but the British Government doesn't want that because the red line is no freedom of movement of people."