By Paul Sandle and Gabriela Baczynska
LONDON/BRUSSELS (Reuters) - Britain and the European Union will hold emergency talks on Thursday over Prime Minister Boris Johnson's plan to undercut parts of the Brexit divorce treaty, with Brussels exploring possible legal action against London.
As Britain pushes ahead with its plan to act outside international law by breaching the divorce treaty, EU negotiators are trying to gauge how to deal with London.
European Commission Vice President Maros Sefcovic will meet British counterpart Michael Gove in London at 1200 GMT and chief negotiators Michel Barnier and David Frost will hold trade talks.
If unhappy with what London says, the EU could use a part of the Withdrawal Agreement to take legal action against Britain, though there would be no resolution before the end-of-year deadline for Britain's full exit.
"The dispute-settling mechanism under the Withdrawal Agreement is there," an EU diplomat dealing with Brexit told Reuters.
Two other EU officials said the Commission would analyze Britain's proposed Internal Market Bill - overriding parts of the Withdrawal Agreement - once it is passed to take account of amendments before making a final decision on the legal case.
A note distributed by the EU executive to the 27 EU member states said the bloc could start so-called infringement procedures against Britain.
The British government says its planned law, put forward on Wednesday, merely clarifies ambiguities in the Withdrawal Agreement, but also says its main priority is the 1998 Northern Irish peace deal that ended decades of violence. It said the bill would be debated on Monday.
Europe's leaders have been handed an ultimatum: accept the treaty breach or prepare for a messy divorce when Britain disentangles itself from the EU at the end of the year.
Britain signed the treaty and formally left the EU in January, but remains a member in all but name until the end of 2020 under a status quo agreement.
Sterling was flat at $1.2999 though overnight sterling implied volatility rose to 13%, its highest since March 26, and the FTSE 100 share index slipped.
IRELAND
Talks on a trade deal have snagged on state aid rules and fishing. Without an agreement, nearly $1 trillion in trade between the EU and Britain could be thrown into confusion at the beginning of 2021 as they also deal with the economic impact of the coronavirus pandemic.
The latest dispute centers on rules for Northern Ireland, which shares a land border with EU member Ireland. Under the 1998 agreement, there must be no hard border in Ireland.
To ensure that, Britain's EU divorce agreement calls for some EU rules to continue to apply in Northern Ireland. But Britain wants power to override many of them, acknowledging this would violate international law.
U.S. House of Representatives Speaker Nancy Pelosi said any potential U.S.-UK trade deal would not pass the U.S. Congress if Britain undermined the 1998 agreement.
Former British leaders Theresa May and John Major scolded Johnson for considering an explicit, intentional breach of international law.
"If we lose our reputation for honoring the promises we make, we will have lost something beyond price that may never be regained," Major said.
European diplomats said Britain was playing a game of Brexit "chicken", threatening to wreck the process and challenging Brussels to change course. Some fear Johnson may view a no-deal exit as a useful distraction from the pandemic.
"I'm not optimistic at this stage," Irish Prime Minister Micheal Martin told national broadcaster RTE when asked how confident he was in a trade deal being reached. He said trust in negotiations had been undermined, making it harder to secure a free trade agreement without tariffs and quotas.
