A draft text set to be agreed by the 27 member states at a summit on Friday, appears to rule out a strong, bespoke trade deal for Britain.
It comes after Theresa May won an agreement with Brussels last week to move talks on to post-Brexit trade with the bloc.
But EU leaders are thought to be concerned existing trading partners like Canada will cry foul if the UK gets a better deal.
The draft text states: “The European Council will calibrate its approach as regards trade and economic co-operation to avoid upsetting existing relations with other third countries”.
The text, leaked to The Times, also insists Britain will have to abide by all EU regulations during any transition period while being barred from taking part in decisions.
It says “all existing Union regulatory, budgetary, supervisory, judiciary and enforcement instruments and structures will apply” during that time.
And the same text threatens to halt trade talks with the UK unless the withdrawal terms agreed by Theresa May become law.
It comes after Mr Davis claimed last week’s agreement was just a “statement of intent” amid claims the Brexit divorce bill would not have to be paid without a trade deal.
The sentiment was echoed by Theresa May in the Commons yesterday, as she told MPs the divorce bill offer was only made “in the context of us agreeing the partnership for the future”.
That stance has caused huge concern in Brussels, which is now expected to demand a withdrawal treaty must be signed off for talks to continue.
The Prime Minister yesterday insisted the UK’s offer to pay a divorce bill of up to £39 billion was conditional on securing a deal.
She said: “It is clear in the joint progress report, I have repeated it in my statement just now, that this offer is on the table in the context of us agreeing the partnership for the future, agreeing the next stage and agreeing the partnership for the future.
“If we don’t agree that partnership, then this offer is off the table.”
In an interview on LBC yesterday, Mr Davis appeared to backtrack on his controversial comments, which caused particular concern in Ireland over maintaining a soft border.
The Brexit Secretary claimed his words had been “completely twisted”
He claimed: “What I actually said yesterday in terms was we want to protect the peace process, want to protect Ireland from the impact of Brexit for them, and I said this was a statement of intent which was much more than just legally enforceable.
“Of course it’s legally enforceable under the withdrawal agreement but even if that didn’t happen for some reason, if something went wrong, we would still be seeking to provide a frictionless invisible border with Ireland.”
Mrs May was widely praised for satisfying Brussels on its red line issues of financial commitments, the Irish border and EU citizens’ rights.
Even Tory Brexit rebels like Anna Soubry and Ken Clarke heaped praise on the Prime Minister in the Commons yesterday.
Pro-EU veteran Mr Clarke was cheered as he congratulated Mrs May on last week’s “triumph”.