Theresa May has suggested the UK will reject a "punitive" Brexit deal from the EU and trade on default World Trade Organisation (WTO) rules with the economic bloc.
The prime minister issued the warning to Brussels after confirming the government would not seek to maintain single-market membership in a central London speech on Tuesday (17 January).
The move is designed to allow Whitehall to introduce EU immigration curbs, which are prohibited under Brussels' free movement rules.
"Britain wants to remain a good friend and neighbour to Europe," May said.
"Yet I know there are some voices calling for a punitive deal that punishes Britain and discourages other countries from taking the same path.
"That would be an act of calamitous self-harm for the countries of Europe. And it would not be the act of a friend.
"Britain would not – indeed we could not – accept such an approach. And while I am confident that this scenario need never arise – while I am sure a positive agreement can be reached – I am equally clear that no deal for Britain is better than a bad deal for Britain."
The Conservative premier also stressed that the UK would not contribute "huge sums" to the EU's budget after a Brexit.
But May failed to rule out small future contributions to the EU, with Britain currently sending around £135m per week to Brussels.
Elsewhere, the PM said she wanted a new customs agreement with the EU, which would allow tariff-free movement of goods and enable Britain to broker its own free-trade agreements.
"That means I do not want Britain to be part of the Common Commercial Policy and I do not want us to be bound by the Common External Tariff," she said.
"These are the elements of the Customs Union that prevent us from striking our own comprehensive trade agreements with other countries. But I do want us to have a customs agreement with the EU.
"Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends."
May's speech to diplomats and politicians at Lancaster House gives the clearest indication yet that the UK is heading towards a so-called "hard Brexit".
But the pound rallied from $1.2165 to $1.2242 on the news that MPs and peers will be given a vote on the final Brexit deal.
"I can confirm today that the Government will put the final deal that is agreed between the UK and the EU to a vote in both Houses of Parliament, before it comes into force," May said.
Liberal Democrat leader Tim Farron said the speech could have been written by a former Ukip leader or backbench Tory MP Peter Bone.
"You can call this Brexit clean, red, white and blue, or whatever you want. But this doesn't disguise the fact that it will be a destructive, Hard Brexit and the consequences will be felt by millions of people through higher prices, greater instability and rising fuel costs," he said.
Green co-leader Caroline Lucas, meanwhile, claimed May's plan to drop full EU single-market access was "reckless".
"May is willing to sacrifice our economy at the altar of ending free movement rather than making sure the benefits are shared more fairly – we believe that is utterly misguided," she said.
The prime minister's address comes just two months before she intends to invoke Article 50 – the mechanism to break from Brussels – and trigger talks with the EU.
But her plans could be frustrated as the Supreme Court is yet to rule on whether MPs should have a vote on invoking Article 50. The historic judgement is expected in January.