Chancellor Philip Hammond has threatened that Britain could transform its economic model into that of a corporate tax haven, if it is isolated from Europe after Brexit.
In an interview with the German newspaper Welt am Sonntag, Hammond commented that if Britain was left closed off from European markets it would not "lie down and say, too bad, we've been wounded".
Instead, he insisted Britain would "do whatever we have to do" and change its corporate laws to become more "competitively engaged".
Hammond said: "We are now objectively a European-style economy. We are on the US end of the European spectrum, but we do have an open-market economy with a social model that is recognisably the European social model that is recognisably in the mainstream of European norms, not US norms.
"And most of us who had voted Remain would like the UK to remain a recognisably European-style economy with European-style taxation systems, European-style regulation systems etc.
"I personally hope we will be able to remain in the mainstream of European economic and social thinking. But if we are forced to be something different, then we will have to become something different."
Asked to clarify what that meant, Hammond added: "If Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage – at least in the short-term.
"In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do.
"The British people are not going to lie down and say, too bad, we've been wounded. We will change our model, and we will come back, and we will be competitively engaged."
It follows weeks of statements from European leaders who said Britain would not be able to retain membershipof the single market, also known as the European Economic Area (EEA), if freedom of movement was restricted through changes in the UK's immigration laws.
Prime Minister Theresa May is expected to announce this week she is "prepared to accept hard Brexit" meaning taking the UK out of the EEA, the European customs union, and the European Court of Justice.
May is to outline her strategy for leaving the European Union in a major speech on Tuesday (17 January), in which it is anticipated she will stick to her "Brexit means Brexit" promise.
Appearing on BBC's The Andrew Marr Show on Sunday (15 January), Labour leader Jeremy Corbyn criticised Hammond's comments, saying it could lead to a trade war.
Corbyn said: "[Hammond] appears to be making a sort of threat to the European community in where if you don't give us exactly what we want, we're going to become this sort of strange entity on the shores of Europe where there will be very low levels of corporate taxation in design to undermine the effectiveness, or otherwise, of industry across Europe.
"It seems to me a recipe for some kind of trade war Europe, in the future. That really isn't a very sensible forward."