BRUSSELS, June 8 (Reuters) - An economic arrangement to avoid a hard border between Ireland and Northern Ireland cannot be extended to the whole of Britain, as London has proposed, the European Union's chief Brexit negotiator said on Friday.
Britain proposed on Thursday a compromise solution for the Irish border issue that would see Britain staying tied to the EU's customs union for up to another year after an almost two-year Brexit transition period.
EU negotiator Michel Barnier told a news conference that the proposal posed a number of questions that had to be answered.
"Let me be very clear. Our backstop cannot be extended to the whole UK. Why? Because it has been designed for the specific situation of Northern Ireland," he said.
"What does it do? Northern Ireland would form part of our customs territory. What is feasible for a territory the size of Northern Ireland is not necessarily feasible for the whole UK."
While Barnier did not reject the British proposal out of hand, sterling deepened its losses after he called the UK's approach to future trade "fairly paradoxical" and said that much work was needed before agreeing the terms of its exit from the bloc.
The pound, which was trading down 0.2 percent, fell further to $1.3356, half a percent lower on the day after Barnier's comments underlined that the two sides - Britain and the EU - remained apart on key issues in Brexit talks.
Against the euro, sterling gave up its gains and traded flat on the day at 87.89 pence.
The FTSE 100 share index hit its highest level of the day as sterling fell. It was last up 0.1 percent as the dollar-earning stocks on the index got a boost. (Reporting by Alastair Macdonald and Philip Blenkinsop; additional reporting by Tommy Reggiori Wilkes and Helen Reid; editing by Robert-Jan Bartunek and David Stamp)