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By Laurence Norman in Brussels and Jenny Gross in London 

A breakthrough Friday in grueling divorce talks between the U.K. and the European Union opened the door to the next stage: tough trade negotiations that will determine Britain's economic relations with Europe, the U.S. and the rest of the world.

After six months of tense negotiations, the EU and the U.K. overcame acrimony to make progress on a handful of contentious issues around Britain's planned departure from the bloc in March 2019, including a financial settlement and the rights of British and EU citizens to live and work in one another's territories after Brexit.

With Friday's deal, British Prime Minister Theresa May gained the EU's provisional assent to advance negotiations on post-departure arrangements. She has vowed to push for an ambitious pact that secures favorable terms of trade with Britain's biggest trading partner, but EU officials have warned any trade deal could be much more limited and take years to hammer out.

The agreement significantly lowered the possibility that Britain, having decided in a close referendum vote on June 23, 2016, to leave the EU, would do so without arranging future relations with the bloc.

While it relieved immediate pressure on Mrs. May to deliver results, Friday's deal was reached in large part because Britain acceded to many of the EU's requirements. The U.K. agreed to pay the EU a net bill that British officials said would come to at least EUR40 billion ($47 billion) in the coming years -- much more than London's initial offer -- and to go further than it originally intended to protect the rights of EU citizens living in the U.K.

The most contentious issue -- how to avoid a hard border between EU member Ireland and Northern Ireland, which is part of the U.K. -- was left largely unresolved. Border arrangements on the island have emerged as a major hurdle in the divorce deal, and while Britain accepted Ireland's demand for explicit promises to resolve the problem, the issue appears likely to cause more trouble ahead.

Investor reaction was muted. The British pound initially traded 0.2% higher against the dollar before falling to trade 0.7% lower at $1.3384, while the U.K.'s blue chip FTSE 100 index was up 1%.

European Commission President Jean-Claude Juncker, following a brief meeting with Mrs. May early Friday to complete the agreement, said his negotiating team was now formally recommending that the leaders of EU member states agree to advance the talks when they meet next Friday.

"I believe we have now made the breakthrough we needed," Mr. Juncker said.

Mrs. May, who has been under pressure from competing factions within her party since losing her parliamentary majority in June, said both sides had made concessions. "I am optimistic about the discussions ahead," she said.

British Foreign Secretary Boris Johnson, who has sparred with Mrs. May over on her Brexit approach, cheered the prime minister, saying the country would remain close to the EU while "taking back control of our laws, money and borders for the whole of the U.K."

Members of a WhatsApp group of euroskeptic Conservative lawmakers on Friday said they were mostly satisfied with the agreement, according to a lawmaker in the group. "It looks OK, as long as her red lines on the customs union and the single market remain," he said, referring to Mrs. May's stated position that Britain won't surrender trade autonomy or allow unchecked EU migration as a price for retaining fluid trade relations with the EU.

He said pro-Brexit lawmakers could reassess their views when difficult decisions arise on trade talks next year.

Friday's deal came together after four days of intensive negotiations. They were sparked on Monday when Arlene Foster, the leader of the Democratic Unionists, a Northern Irish party that Mrs. May's Conservatives relies on for a parliamentary majority, publicly rejected a draft agreement Mrs. May was finalizing in Brussels.

As Downing Street staffers celebrated their annual Christmas party late Thursday, Mrs. May and her top team were sweating over final details. After speaking to Ireland's leader, Leo Varadkar, and holding two late-night calls with Mrs. Foster, Mrs. May got a few hours of sleep before heading to Brussels for predawn meetings.

The agreement includes a British guarantee that the U.K. will do what is necessary to avoid customs checks on the border between Northern Ireland and the south, but is ambiguous on specifics. It says that unless other arrangements are reached to avoid a hard border, the U.K. will allow Northern Ireland to "maintain full alignment" with EU rules, so that smooth economic cooperation between Northern Ireland and Ireland can continue.

The U.K.'s plan to quit the EU single market and customs union would effectively create two economies on the island of Ireland. That division is hard to square with London's declared intention not to erect a physical border between the U.K. and the Republic of Ireland.

"We have got a cast-iron guarantee from the British government that under no circumstances will we see a hard border. That was at the core of what we wanted," Irish Foreign Minister Simon Coveney told state-owned broadcaster RTE.

Anand Menon, professor of European politics at King's College London, said the breakthrough marks significant progress, raising the prospects that the two sides would reach a final deal and making it much less likely that talks would collapse. But many of the big questions, particularly around Ireland, will test both sides, he said. "We have no clue how to sort out the Irish question," Mr. Menon said. "The EU knows as well as we do that this is a holding pattern."

The dispute over Northern Ireland and trade foreshadows a more complicated question at the heart of negotiations: To what extent will the U.K. agree to be a rule-taker versus a rule-maker?

If Britain agrees to abide by EU trade rules, it will minimize trade barriers with the bloc. But that would bear the cost of leaving it less scope to pursue independent trade deals with other countries, such as the U.S.

If Britain seeks a more distant relationship with the EU, in which it can set its own trade rules, it will have more scope to control its own borders and laws but create trade barriers with EU countries, which together constitute its most important trading partner.

Mrs. May's top officials say her divided government has yet to debate the issue.

EU chief negotiator Michel Barnier warned that if Britain's red lines remain the same -- leaving the EU's single market and customs union and being fully independent of EU court rulings -- a future trade deal would likely resemble the EU's merchandise-focused trade deal with Canada.

British officials have said they want a more ambitious deal that includes the finance sector and other services.

Mrs. May has said Britain would request a two-year transition period after Britain's planned exit date of March 2019 to avoid a hard landing for the British economy. A new trade agreement can only be signed after Britain leaves the bloc.

Friday's pact will next go to leaders of the other 27 EU countries for approval. European Council President Donald Tusk, who coordinates EU leaders, said he had circulated the EU's draft guidelines -- the key principles of its approach -- to the future trade relationship. EU leaders will need to agree and sign off that text next Friday.

Mr. Tusk also said the EU and the U.K. should move quickly to start negotiating the transition period to provide certainty for businesses well in advance of Britain's departure. Talks on that could begin in early January, officials said.

--Emre Peker in Brussels and Paul Hannon in London contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com and Jenny Gross at jenny.gross@wsj.com

(END) Dow Jones Newswires

December 08, 2017 18:28 ET (23:28 GMT)

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