The proposed change would affect millions of Britons who travel to Europe every year and is likely to cause outrage among motorists.
Slides released by the European Commission setting out its negotiating position warn the mutual recognition of licences will be axed if an appropriate Brexit deal is not reached.
They say that, should the UK exit the internal market for road transport, “all current EU law-based rights, obligations and benefits cease”.
And they make clear it will mean the end of “mutual recognition of driving licences, vehicle registration documents and certificates of professional competence for drivers.”
The Government says it is confident an agreement will be put in place.
But, as a precaution, preparations are being made to sign the UN convention on road traffic.
That would allow drivers to apply for an International Driving Permit allowing them to take to the road in the bloc.
The time-consuming process would set people back £5.50 for every application made.
Transport Secretary Chris Grayling said: “We believe reaching an agreement to continue the liberal access enjoyed by both sides is in everyone’s interests and remain confident we will do so.”
Alongside the changes to driving licences, the slides explicitly reject Theresa May’s approach to future regulatory cooperation.
Mrs May wants different areas in which the UK would either continue with existing regulatory frameworks, operate its own separate rules largely mirroring those in the EU or diverge significantly from the Brussels regime.
But the slides stated: “UK views on regulatory issues in the future relationship including ‘three basketapproach’ are not compatible with the principles in the European Council guidelines.”
They warn British attempts to “cherry-pick” EU rules threaten the integrity of the single market, while efforts to preserve UK influence over EU decision-making after Brexit “risk to unsettle the EU ‘ecosystem”.
The warnings came as Mrs May sat down for an eight-hour meeting with her top team to thrash out a position on a post-Brexit withdrawal settlement.
Her 11-member inner Cabinet Brexit committee are meeting at the Prime Minister’s country residence to decide a clear negotiating path as talks with Brussels step up a gear.
With the gathering expected to continue late into the evening, Mrs May is aiming to get clear Cabinet consensus on the details of Britain’s framework for a future relationship with the EU.