Theresa May had wanted to calm uncertainties by assuring Britain’s 1.2million workers living in the EU could keep their rights to residence, work and healthcare after Brexit, by Britain promising the same for the EU’s 3.3million workers in the UK.
But any hopes of warm relations with Germany before Article 50 is triggered were dashed by a frosty Angela Merkel.
One senior European Commission official reportedly encouraged a mutual understanding with British diplomats.
But it has now been revealed Mrs May was slapped down during talks with Mrs Merkel in Berlin on November 18 as the German Chancellor once again refused to take part in any negotiations until Britain formally begins the divorce process.
Sources familiar with the matter told Politico Mrs Merkel was polite but firm when she rebuffed Mrs May’s appeal for assurances for both Brits living in the EU and EU nationals in the UK.
Berlin has repeatedly backed the EU’s stance that there shall be “no negotiations without notification” and this rejection indicates Mrs Merkel’s determination to prioritise the EU27 over any future relationship with the UK.
Mrs May has said she will trigger Article 50 in March next year.
German officials are said to be concerned that discussing expats could delay Britain triggering Article 50 and give hope that Brussels will make concessions over single market access and free movement of people.
A deal on citizens may have tempted London to talk from the two year Brexit talks without a final agreement and abandon the estimated £50billion for residual liabilities to the EU, according to German diplomats.
Brussels is said to be reluctant to guarantee rights before Article 50 is triggered and commit to the burden of providing free healthcare to the 300,000 mostly elderly Britons living in Spain.
It is believed the EU wants to keep expat rights on the table as a sweetener during the final phase of Brexit negotiations, expected to take place in 2018.
One source familiar with Mrs Merkel told Politico: “It is the British who decided to leave the EU, not the EU that is leaving Britain.
“So they can’t now say they want to keep just the bits they like and discard the rest.”
Number 10 said: “I don’t think we’d get into details of private meetings” but noted Mrs May has made it clear what she hopes to achieve with “reciprocal rights”.
Mrs May has so far refused to guarantee the rights of EU citizens living in the UK for fear of revealing Britain’s hand ahead of Brexit negotiations.
But has stressed the only reason she would not guarantee the rights of EU citizens is if the EU27 refuse to offer the same rights to Britain.
MPs have called for the issue to be discussed at an EU summit in December in a letter sent to European Council president Donald Tusk.
Organised by Tories Michael Tomlinson and Steve Baker, the letter says citizens should not be used as “bargaining chips” in Brexit negotiations.
It comes as the Prime Minister and her Polish counterpart discuss the matter at Downing Street.
With more than 800,000 Poles living in the UK, Mrs May’s spokeswoman said: “As we leave the EU there will be a whole range of issues to address and settle, and clearly access to welfare system will be one of those issues that needs to be looked at.
“I think what you do see from the Prime Minister and the Polish prime minister is a desire to provide reciprocity to British citizens and Polish citizens and other citizens in Europe.”