EU's Barnier warns time running out for Brexit deal

* Transition pact not yet in the bag, EU negotiator warns

* EU will publish draft withdrawal treaty on Wednesday

* Tone sharpening as May prepares key speech on Friday (Adds further comments, Fox, Johnson, Scots, Welsh developments)

By Gabriela Baczynska and Jan Strupczewski

BRUSSELS, Feb 27 (Reuters) - EU negotiator Michel Barnier accused the British government on Tuesday of clinging to "illusion" while time runs out for a Brexit deal to avoid massive disruption when Britain leaves the European Union next year.

Speaking after briefing ministers from the other 27 EU states and ahead of publication on Wednesday of a first draft of a withdrawal treaty that officials say will cross many British red lines, Barnier returned to a familiar mantra that had become muted after an interim deal with London two months ago.

"The clock is ticking. I am worried by the time, which is short," he told reporters, referring to an October target for agreeing a treaty, including a transition period, in time for it to be ratified before Brexit in March 2019.

With British politics still in turmoil over Brexit, a mammoth project rejected by nearly half the country in a 2016 referendum, there has been a sharpening of tone on both sides.

British officials accuse Brussels of eschewing creative solutions to avoid trade disruption, while EU leaders complain that Prime Minister Theresa May's divided government is failing to make its intentions clear.

Asked about a comment by the EU summit chair last week that ideas for a future trade pact being floated ahead of a key May speech on Friday were "pure illusion", Barnier said he agreed with Donald Tusk. "It is illusory to imagine we will accept cherry-picking," he said of the idea that Britain could maintain EU regulations in some sectors, while diverging in others.

Barnier also renewed his warning that a status quo for business for a couple of years after Brexit could not yet be taken for granted, given outstanding differences. And warning of a lack of progress in other areas of the talks, he said he was ready to meet his British counterpart David Davis urgently.

Both sides had hoped an interim accord in December on how much Britain would pay Brussels and how expatriate citizens' rights would be protected would lead to a quick agreement by next month on a transition period, during which Britain would remain bound by EU rules, giving businesses time to adjust.

However, May has pushed back on some EU proposals, such as rights for EU citizens arriving to live in Britain during the transition and mechanisms to hold London to EU law, while London is also seeking some flexibility up-front in the EU's proposal to complete its separation at the end of 2020.

Barnier spoke of "significant points of disagreement" on the transition, and suggested Britain was trying to keep it open-ended. EU governments are keen that it does not become a long-term arrangement, though most are willing to consider extending it into 2021 if a future trade deal takes longer to take effect.

May's spokesman played down the differences.

"During a negotiation you would not expect both sides to immediately agree on everything. What's absolutely clear is that both the UK and the EU agree that an implementation period is beneficial and we're working to reach agreement in March," he said.

WITHDRAWAL DRAFT

Among controversial elements of the draft withdrawal treaty to be agreed by the executive European Commission on Wednesday are clauses on the enforcement of its terms for years to come by the EU court and on preventing "regulatory divergence" across the Irish border.

British Brexit campaigners have already spoken out against what they expect the EU text to say. British officials stress that the text will reflect only an EU negotiating gambit in some cases, although other passages will translate into legal terms the agreements reached by both sides two months ago.

Foreign Secretary Boris Johnson dismissed the EU's plan to hold Britain to judgments in the European Court of Justice , though EU officials say they have yet to hear a clear alternative from London on how to settle disputes.

British officials are also uneasy about the EU writing into the draft that London will maintain regulations in Northern Ireland (Other OTC: IRLD - news) to avoid diverging from EU rules in the Irish Republic and so avoid a "hard border" that could disrupt the peace. EU officials acknowledge that Britain has said there may be other ways to avoid border friction -- but has yet to offer details.

Brussels is awaiting May's proposals for a future trade relationship on Friday. EU leaders plan to approve a negotiating mandate for Barnier on those trade talks when they next meet in Brussels on March 22-23. The aim would be to agree a broad "political declaration" on the future to accompany the withdrawal treaty and to have a trade pact ready for 2021.

May has ruled out remaining in the EU single market or customs union. Her Labour opponent Jeremy Corbyn outlined a plan on Monday to stay in a customs union, opening up a gap between the two big parties on Brexit that raised questions on whether May can pass her Brexit legislation, given her narrow majority.

May's trade minister, Brexit campaigner Liam Fox, dismissed the Labour proposal as a "sell-out" as it would bind Britain to many EU rules while preventing it striking its own trade deals.

Adding to doubts about how Britain will implement Brexit, the Scottish government confirmed plans for its own legislation on the withdrawal, a plan to be emulated in Wales. (Additional reporting by Phillip Blenkinsop and Samantha Koester in Brussels, Elisabeth O'Leary in Edinburgh and William James and Andrew MacAskill in London Writing by Alastair Macdonald @macdonaldrtr Editing by Gareth Jones)