IMF boss Christine Lagarde has warned Britain to brace for a no-deal Brexit as the global finance giant predicts a "substantial" hit on the UK economy.

Speaking in London, the former French economy minister said a "disorderly" or "crash" withdrawal from the EU would lead to reduced growth, a bigger deficit and the depreciation of sterling, all of which would impede the UK economy.

She said: "The larger the impediments to trade in the new relationship, the costlier it will be.

"This should be fairly obvious, but it seems that sometimes it is not."

In its latest assessment of the UK's finances, the IMF said all likely Brexit scenarios would "entail costs for the UK economy", but "no-deal" will mean a "significantly worse outcome".

Although new trade deals could arise as a result of Brexit to "eventually pare some of these losses for the UK", these are "unlikely to bring sufficient benefits to offset the costs imposed by leaving the EU", according to the international economic think tank.

And the cost of Brexit will "exceed" any savings from lower contributions to the EU budget.

The IMF has now urged UK authorities to prepare policies that will "safeguard macroeconomic and financial stability" in the case of a chaotic Brexit.

Commenting, Chancellor Philip Hammond said: "We are at a critical juncture for the UK economy. Despite the contingency actions we are taking, leaving without a deal would put at risk the substantial progress the British people have made over the last ten years."

Hammond was present for the launch of the report at the Treasury today. It said the Treasury and Bank of England should be prepared for the possibility of "sharp declines in sterling and other asset prices" and the Bank should be ready to act to ensure the financial system has adequate liquidity.

Meanwhile, plans should also be in place for a possible "significant" increase in interest charged on government debt and ministers may have to boost economic activity by bringing forward major infrastructure projects.

However, any easing of fiscal policy – for example, by cutting interest rates to stimulate the economy – would have to be temporary and introduced as part of a "credible" longer-term plan to keep debt under control.

Issuing her "no-deal" caution, Lagarde said: "It will be a shock to supply. It would inevitably have a series of consequences in terms of reduced growth going forward, increased deficit most likely, depreciation of the currency.

"It would mean in reasonably short order a reduction in the size of the UK economy."

The UK has already fallen from the top to near the bottom of G7 growth tables in the wake of the 2016 referendum, with business uncertainty holding back investment and the fall in the value of the pound feeding through to higher inflation and slower growth in incomes and consumption.

The IMF noted that "fundamental questions", particularly on the Northern Irish border, remain to be answered in order to secure a smooth Brexit, adding: "Resolving these issues is critical to avoid a no-deal Brexit on World Trade Organisation terms that would entail substantial costs for the UK economy - and to a lesser extent the EU economies - particularly if it were to occur in a disorderly fashion."