UPDATE 1-Prospects for Swiss-EU treaty dim as talks yield no breakthrough

Prospects for a treaty cementing ties between Switzerland and the European Union, its biggest trading partner, appeared to fade on Wednesday as four years of negotiations failed to produce a breakthrough by the EU's mid-October deadline.

The talks are complicated by Britain's separate negotiations on divorce terms from the EU, with the European Commission loath to be too soft on the Swiss for fear of providing ammunition to Brexiteers.

"I can honestly say I find it difficult to believe that the government will be able to present by year's end a solution to all the open questions," said Petra Goessi, leader of the pro-business Liberals party in the four-party cabinet.

"Switzerland is not yet ready" for a treaty, she told the Neue Zuercher Zeitung daily in an interview published on Wednesday.

Labour rules to protect high wages in non-EU Switzerland from cross-border competition have been a bone of contention with Brussels.

Talks seemed deadlocked after a meeting of top negotiators in Brussels on Tuesday.

"Major political issues remain open. It is in this light that the European Commission will now have to assess at political level how to proceed," a Commission spokeswoman said.

The Swiss government said after a meeting on Wednesday of the cabinet, called the Federal Council, only that it took note of the situation. "No date was officially given for the end of the talks. What matters most for the Federal Council is the quality of the agreement reached and the Council will release its decisions in due time," a spokesman said.

Brussels has been pressing Switzerland to agree on a pact that would sit atop an existing patchwork of 120 sectoral accords and have the Swiss routinely adopt changes to single market rules.

It would focus on five areas linked to the single market: the free movement of people, civil aviation, land transport, mutual recognition of industrial standards and processed farm goods. The treaty would also provide a more effective platform to resolve disputes.

Should treaty talks fail, the sectoral accords would stay in effect, but two-way ties would enter a deep freeze.

Failure to strike a deal would mean no increase in Swiss access to the single market, dashing hopes for a new electricity union. It could also endanger unfettered EU market access for Swiss makers of products such as medical devices if pacts on mutual recognition of standards lapse.

The Commission has threatened not to extend beyond this year recognition of Swiss stock exchange rules that allow cross-border trading, which could touch off a tit-for-tat escalation. 

(With inputs from agencies.)