By Laurence Norman 

European officials on Wednesday said they weren't seeking to punish Britain for leaving the bloc but warned that a speech by Prime Minister Theresa May outlining her approach to Brexit still left the two sides headed for tough negotiations.

German Chancellor Angela Merkel said she welcomed an acknowledgment by Mrs. May's that Britain's desire to limit EU migration in the future meant it couldn't have unfettered access to the bloc's single market of goods and services.

"We have now got a clear impression of how Britain is going to proceed," she said in her first public reaction to the speech, "but the negotiations begin only when the application is made."

European Commission President Jean-Claude Juncker said he told Mrs. May in a telephone call on Tuesday after the speech that the EU was "not in a hostile mood."

"We want a fair deal with Britain and a fair deal for Britain but a fair deal means a fair deal for the European Union too," he said in a press conference in Strasbourg, France. "It will be a very, very, very difficult negotiation."

In a speech at turns friendly and combative, Mrs. May described an independent Britain that takes control over its borders, leaves the European Court of Justice's jurisdiction and abandons the single market.

She said she hoped for a close partnership with the EU and a new trade deal, but warned the U.K. would set competitive tax rates if its other 27 members sought to punish Britain for leaving. Mrs. May has pledged to trigger Article 50 of the Lisbon Treaty--starting the formal two-year negotiation period for its exit--by the end of March.

European Council President Donald Tusk praised Mrs. May's "warm and balanced" words and welcomed the fact that Britain had "finally understood and accepted" the idea that Britain couldn't keep control of its migration policy while remaining in the single market. He warned Britain however against trying to split the bloc on other issues.

"It would be good if our partners also understood that there will be no place for pick-and-choose tactics in our future negotiations," he said.

Maltese Prime Minister Joseph Muscat, whose country took over the rotating presidency of the EU on Jan. 1, warned of "arduous" talks and said that Britain cannot emerge from the EU with the same benefits it now has.

But he signaled some wiggle room. Mrs. May said she hoped to agree with the EU not only on exit terms but the shape of the future relationship within two years.

European officials have held that the main focus of talks will be on divorce terms, a line maintained by Mr. Muscat. Negotiations on a future trade deal could only come after that.

However, when pressed, Mr. Muscat said that is a decision EU leaders still need to take.

"I think I reflected the thoughts of quite a number of people when I said that," he told reporters. "But I will not pre-empt my colleagues on them deciding themselves during an extraordinary council the sort of attitude they will" adopt.

Mrs. May is also dealing with challenges at home. The U.K. Supreme Court said it would deliver a judgment on Tuesday about whether she can formally begin divorce proceedings without consulting Parliament. A ruling against the government could open her plans to stronger scrutiny, but Mrs. May has said it won't delay her timeline.

Valentina Pop in Brussels and Andrea Thomas in Berlin contributed to this article.

Write to Laurence Norman at laurence.norman@wsj.com

(END) Dow Jones Newswires

January 18, 2017 11:56 ET (16:56 GMT)

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