Taoiseach Micheál Martin said it will be difficult for the EU and UK negotiating teams to "square the circle" to reach a post-Brexit trade deal.
He said both sides are aware of the "enormity and severity" of a no-deal Brexit on their respective economies.
"They have really sought to crack the level playing field issue along with fisheries and, crucially, this dispute mechanism that would underpin any level playing field framework," he said.
"The fact that they have continued to engage ... without understating the enormous challenges that face both sets of negotiators in trying to square the circle around this level playing field and standards."
He said the mood at last week's EU Council meeting was "downbeat".
Mr Martin also said the 97% agreed part of the deal is "very important".
"A lot has been done and it would be a terrible pity to lose all of that in terms of the normal living that people should rightly expect, citizens of the UK, Ireland and Europe," he added.
Taoiseach Micheál Martin said: "The circle is going to be difficult to square but we need to stand back too from the high principle of this and say 'Britain is a first-world economy, its economy has been integrated with the EU economy for the last 50 years'.
"I am not convinced that there is going to be a significant divergence in standards into the future.
"That said, people may seek advantage to supporting particular industries and sectors through state aid and that's got to be dealt with and addressed through an agreement which would allow for a dispute resolution mechanism.
"I think most trade disputes have dispute resolution mechanisms within them and it's not unusual to have that.
"In relation to negotiations around a trade deal and a future relationship agreement, that is strictly between Michel Barnier and their negotiating team and the British negotiating team.
Mr Martin said he had not spoken to Prime Minister Boris Johnson over the weekend, but added it is important that good British and Irish relations continue after Brexit.
"We know that the Good Friday Agreement was founded on a very strong relationship between Britain and Ireland and the two governments and that will continue," he added.