The chancellor, Philip Hammond, has warned that the UK will build its own satellite navigation system to rival the European Union’s €10bn (£9bn) Galileo project if Brussels carries out its threat to block access.

The European commission has cited legal issues about sharing sensitive information with a non-member state to justify its decision to shut British firms out of the project. The EU has also said it will restrict access to encrypted signals from Galileo.

Speaking as he arrived in Brussels for a meeting of finance ministers on Friday, Hammond said the UK could not accept the EU’s decision to block British companies from the satellite’s manufacture and the government from secure aspects of the project.

He told reporters: “We need access to a satellite system of this kind. A plan has always been to work as a core member of the Galileo project, contributing financially and technically to the project.

“If that proves impossible then Britain will have to go it alone, possibly with other partners outside Europe and the US, to build a third competing system. But for national security strategic reasons we need access to a system and will ensure that we get it.”

The UK is said to be hopeful that Australia could be a partner for such a rival project, should the impasse with the EU continue.

The EU is insistent that the UK had agreed in 2011 as an EU member state on the rules on blocking non-EU countries from access to secure elements of the project.

A senior EU official said, after some fraught negotiations this week, that it had become clear the UK “would like to transform Galileo from a union programme to a joint EU-UK programme, and that is quite a big ask for the EU”.

“They want to have privileged access to the security elements of PRS (the encrypted navigation system for government-authorised users) and to be able to continue manufacturing the security modules which would mean that after Brexit the UK, as a third country, would have the possibility to turn off the signal for the EU,” the official said.

“It also means they are asking for information and the possibility to produce the security modules that would give them information that currently not all member states have.”

The European commission will to report back to member states to gauge their views, but the UK’s approach has been described as a “big ask”.

On Thursday, the EU accused British negotiators of “chasing a fantasy” and failing to get to grips with the consequences of Brexit. A senior EU official also claimed progress on the problem of avoiding a hard border on the island of Ireland was proving elusive, something the UK government sources suggest is mere posturing by Brussels.

In a sign that the criticism has been felt, the prime minister’s chief Brexit adviser, Olly Robbins, who has been leading the talks this week, wrote a rare tweet on Friday morning.

He said: “Very proud of the x-Government team that worked so hard to support technical talks in Brussels this week. UK proposals for a deep relationship, calmly and professionally presented.”

The shadow chancellor, John McDonnell, said: “On the same day the Office for National Statistics has confirmed that UK economic growth is the weakest it’s been in six years, it’s not surprising the chancellor is looking to focus on matters in outer space.

“Working people will be rightly angry that Philip Hammond can find billions of pounds at the drop of a hat for a space programme, yet is not prepared to find the money our vital public services like the NHS desperately need.

“It’s time the chancellor came down to Earth, to prove he is on the same planet as the rest of us by recognising what he is putting people in our country through with his austerity cuts.”

The EU wants the UK to agree by a European council summit in June to present a workable backstop position for Northern Ireland that would come into force should a future trade deal or bespoke technological solutions fail to arise that could avoid the need for a hard border.

In recent days, the prime minister has suggested a solution could be found in the UK staying in the customs union for a time-limited period.

But the EU is insistent that the backstop must be “Northern Ireland-specific”. The official said: “We have to do away with the fantasy that there is an all-UK solution to that.”

Responding to the EU’s withering assessment of the UK’s approach, Hammond told reporters: “We’re having very constructive discussions. I don’t think that’s a particularly helpful comment; there are obviously a wide range of views on both sides.“Everybody I’ve engaged with has been very constructive, very keen to find a way to move forward. We’re very conscious of the ticking clock and the need to make significant progress for the June European council and that’s what we’re here to do.”

Hammond said the government was looking at “all sorts of options to deliver the reassurances that are being sought around maintaining the Irish border in an open condition”.

He said: “That’s a priority for us. We’re very keen to find a way to move forward and we’re looking at all the options.”