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UK's May sets out transition plan in bid to unlock Brexit talks

* May sets out two-year transition plan

* Adds concessions on expats, Brexit bill to spur talks

* One EU official says more concerned than ever (Adds EU reaction, Labour, Johnson comments, more detail)

By William James and Isla Binnie

FLORENCE, Italy, Sept 22 (Reuters) - Prime Minister Theresa May set out a plan on Friday to retain full access to the EU's single market for two years after Brexit to try to reassure business and reset the tone of stalled negotiations with Brussels.

But her proposals for such a transition, while meeting Britain's financial obligations and protecting EU citizens' rights, fell short of what the EU wanted. One official said the speech had left him "even more concerned".


In a speech in a 14th century church in Florence, Italy, May appealed directly to EU leaders to unlock the talks that have stalled over a series of issues, including over how much Britain should pay as part of its divorce settlement.

She (Munich: SOQ.MU - news) spent much of her 30-minute speech describing the similarities between Britain and the EU, warning that if the complicated talks to unravel more than 40 years of union should fail, the only beneficiaries would be those who oppose democracy, liberalism and free trade.

Sterling fell against both the dollar and the euro during May's speech, weakening by more than half a cent against the U.S. currency.

"Clearly people, businesses and public services should only have to plan for one set of changes in the relationship between the UK and the EU," May told Italian business leaders and diplomats.

"So during the implementation period, access to one another’s markets should continue on current terms and Britain also should continue to take part in existing security measures."

Britain wants to move the talks forward and start addressing how a future relationship with the EU would work, a move May's government says is vital if they want to find agreement on the divorce settlement bill currently under debate.

But the EU has stood firm, refusing to discuss trading arrangements until "sufficient progress" had been made on the first three issues - the financial settlement, the border with EU member Ireland (Other OTC: IRLD - news) and the protection of expatriates' rights.


Beyond her vision for a transition, involving around two years of trading on same terms but no payments for access to the EU single market, May pledged protection of EU citizens' rights in Britain after Brexit, saying decisions by the European Court of Justice would be taken into account by British courts.

On the financial settlement, she also said Britain would "honour commitments we have made during the period of our membership". "Still I do not want our partners to fear that they will need to pay more or receive less over the remainder of the current budget plan as a result of our decision to leave."

But she said little on Ireland, beyond that both sides do not want a return to a "hard border" with Northern Ireland that could reignite tensions on the island.

The head of the European Parliament's biggest group, the centre-right European People's Party, Manfred Weber said May's speech had brought no more clarity. "I am even more concerned now," he added.

But one EU diplomat working on Brexit said there were two important sentences in the speech, describing as "quite something" her decision to honour commitments stemming from EU membership and on UK court referrals to European justice.

British opposition were not impressed, with the country's main opposition Labour Party saying the government was "no clearer about what our long term relationship with the EU will look like" and trade union leader Frances O'Grady describing the prime minister as pretending "we can have our cake and eat it".

It was never going to be an easy speech, trying to appeal to both the EU and the pro-Brexit supporters in her own party, who want to keep her to her pledge for a clean break with the bloc.

"It's clear that we're out," one senior Conservative source said, adding that he was pleased to hear May agree that no deal was better than a bad deal.


May's speech comes at the start of a crucial week for Europe.

On Sunday, German voters are expected to return conservative Chancellor Angela Merkel to power but also vault eurosceptic parties into parliament, including the Alternative for Germany (AfD) whose nationalist, anti-immigrant ideas echo those of Britain's UKIP party, a driving force behind Brexit.

Two days later, French President Emmanuel Macron is expected to flesh out his ideas for a "relaunch" of the EU and euro zone, underscoring the bloc's determination to press ahead with a closer union that excludes the UK.

Despite disagreement, both sides agree on one thing - the clock is ticking, with EU negotiator Michel Barnier saying there is only a year left to find an agreement to stop Britain from crashing out of the bloc.

May's ill-fated decision to have an election in June not only used up time but also sapped her authority and gave a stronger hand to pro-Brexit lawmakers who want a total break with the bloc and to reduce any divorce bill to zero.

At the speech, May's top team of ministers put on a show of unity - with foreign minister Boris Johnson, one of Britain's most prominent hardline Brexit politicians and a one-time leadership contender, sitting on the front row.

"I think what was so uplifting about this speech was it was positive it was confident about what Britain can do but also about our relations with the rest of the EU," Johnson said. (Additional reporting by Elizabeth O'Leary, Kate Holton, Elizabeth Piper and Kylie MacLellan in London, Noah Barkin in Berlin; editing by Mark Heinrich/Guy Faulconbridge)