* French official says "no deal" not most likely scenario
* But all agree it would be bad news
* Owe it to investors, businesses to plan for all scenarios
By Richard Lough
PARIS, June 27 (Reuters) - Prime Minister Theresa May will be told at a European summit this week that while there is progress on the terms of Britain's departure from the European Union, both sides should prepare for a "no deal" scenario, a French presidency source said.
With nine months left until Britain is due to leave the EU, there is still little clarity over Britain's future relationship with the bloc after Brexit.
Without agreement, in particular over how to avoid a hard border between Ireland and Northern Ireland after withdrawal, the EU cannot conclude a "divorce" treaty with Britain, raising the prospect that Britain could leave without a deal.
"Everyone agrees that a no deal scenario is bad news," the Elysee Palace official told reporters in a briefing ahead of the June 28-29 summit of EU leaders in Brussels.
The Elysee official said leaders at the summit will convey to May that despite advances in negotiations, key points remain unanswered and that, since the clock is still ticking, it is necessary to prepare for no deal.
"It’s not what we want, it's not what the British want," the official added. "Nor is it the most likely option. But we have to prepare for it with seriousness because it would be inexplicable for us, on both sides, to tell our investors and our businesses 'we have not prepared for this scenario.'”
In Copenhagen, Danish Prime Minister Lars Lokke Rasmussen said Brexit could end without a deal.
"It is the first time we are saying clearly to the British, that we can end in the worst scenario, no deal," Rasmussen said in a parliament committee meeting.
Draft summit conclusions seen by Reuters presented a softer tone. They showed that the leaders of the 27 countries that will remain in the EU after Britain leaves in March 2019 will express concern that no substantial progress has been over the Irish border question.
The draft says: "The European Council renews its call upon Member States, Union institutions and all stakeholders to step up their work on preparedness at all levels and for all outcomes".
The leaders will also call on Britain to provide "realistic and workable proposals" on its future relationship, according to the draft.
Manufacturing giants such as Airbus have followed banks in voicing mounting frustration at the slow pace of negotiations as concerns about Britain crashing out of the EU without a deal grow. (Reporting by Richard Lough and Jean-Baptiste Vey in paris, Emil Gjerding Nielson in Copenhagen, Jan Strupczewski in Brussels; Editing by Luke Baker and William Maclean)