BRUSSELS (Reuters) -Britain and the European Union have moved closer to sealing a new trade deal but it was still unclear if they would succeed, the blocs chief executive said on Wednesday.

Britain and the EU are in the final stretch of talks to keep an estimated one trillion dollars of annual trade free of tariffs and quotas beyond Dec. 31, when the United Kingdom finally transitions out of the worlds largest trading bloc.

With just over two weeks left, Prime Minister Boris Johnson said he hoped the EU would see sense and agree a deal that respected Britains sovereignty, while German Chancellor Angela Merkel said the bloc favoured agreement.

European Commission President Ursula von der Leyen told the European Parliament: I cannot tell you whether there will be a deal or not. But I can tell you that there is a path to an agreement now. The path may be very narrow but it is there.

Her relatively upbeat comments on the long-running Brexit crisis helped nudge sterling upwards on currency markets. However, von der Leyen also said two issues were still unsolved.

We have found a way forward on most issues but two issues still remain outstanding: the level playing field and fisheries, she said. Issues linked to governance now have largely been resolved. The next days are going to be decisive.

The level playing field refers to EU insistence that Britain does not undercut it on environmental, labour and social standards, as well as state aid, while governance covers the resolution of disputes.

Von der Leyen said discussions about access to UK fishing waters for EU vessels were still very difficult.

Britain formally left the EU on Jan. 31 but has been in a transition period since then under which rules on trade, travel and business remain unchanged. It finally exits the blocs single market and customs union on Dec. 31.

Failure to agree a deal would erect trade barriers between the EU and Britain, snarl borders, send shockwaves through financial markets and cause chaos in supply chains across Europe as it also struggles with COVID-19.

SEE SENSE

Johnson, who won election last year pledging to get Brexit done and for Britain to take back control, said he hoped the EU would see sense and do a deal.

He emphasised the point at a press conference, when he said: Where we get to with the EU - well, again, that is very much a matter for our friends. They know what the parameters are.

His spokesman said no trade deal was still the mostly likely outcome. A later statement from Johnsons office said talks would continue over the coming days.

Britains parliament will begin its Christmas break on Thursday, but could be recalled at short notice and as early as next week to legislate if a deal is reached.

Merkel said the EU would prefer a deal but is prepared either way, adding there was no breakthrough yet.

French President Emmanuel Macron, who is at odds with Britain over fish quotas, said he wanted the best relationship with London.

FILE PHOTO: European Commission President Ursula Von Der Leyen speaks during a debate on next EU council and last Brexit development during a plenary session at the European Parliament in Brussels, Belgium November 25, 2020. Olivier Hoslet/Pool via REUTERS/File Photo

But the two sides have yet to narrow gaps on two of the thorniest issues: fishing rights in British waters and the level playing field.

An EU official told Reuters the bloc had rejected Britains offer of phased access to its waters over three years by EU fishing vessels and the sides were an ocean apart on the issue.

Von der Leyen hailed a big step forward in agreeing a so-called non-regression clause, which would ensure that our common high labour, social and environmental standards will not be undercut.

Sources said there were disagreements over balanced equivalence, which London saw as tying Britain to the EUs regulatory orbit, and a dispute resolution mechanism to determine whether competition was distorted and remedies if so.

Britain saw the EUs pitch for effective remedial measures as giving the bloc too much leeway to retaliate on trade.

Reporting by Francesco Guarascio, Marine Strauss, Gabriela Baczynska, William James and Elizabeth Piper in London, Sudip Kar-Gupta in Paris and Paul Carrel and Michael Nienaber in Berlin, Writing by Robin Emmott, Gabriela Baczynska and Elizabeth Piper; Editing by Giles Elgood and Andrew Cawthorne

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UPDATE 2-Progress on Brexit but coming days will be critical, says EU chief - Reuters