By David Milliken

LONDON (Reuters) - Britain's government needs to immediately rule out leaving the European Union without securing preferential access to the bloc's single market, or investment will suffer, the head of a leading business organization said on Saturday.

Financial markets have already reacted to signs Britain could be heading for a 'hard Brexit' with limited access to the bloc, as sterling tumbled to its lowest in 31 years on Friday.

Carolyn Fairbairn, director-general of the Confederation of British Industry, said the government had not publicly excluded the possibility it would accept a very poor trade deal to secure other goals when leaving the EU in just over two years' time.

"What we would like is a ruling out of the really worst options," Fairbairn said in an interview with the BBC on Saturday after she and the leaders of three other trade bodies had made a similar call to the government late on Friday.

"It is the investment decisions that are being taken now that make this urgent," Fairbairn added.

Earlier this week Prime Minister Theresa May said she wanted to give British businesses the "maximum freedom" to trade with and operate within the EU, when she starts formal exit talks early next year.

But she said it was non-negotiable that Britain would block free movement of EU citizens and reject the jurisdiction of the European Court of Justice. The EU views both these as integral to its single market for trade, capital and labor.

If Britain fails to agree at least a temporary trade deal with the EU before the two-year legal time limit on formal exits talks expires, then it will default to World Trade Organization rules for access to the single market. These involve tariffs on manufactured goods and many restrictions on services.

"Every credible study that has been conducted has shown that this WTO option would do serious and lasting damage to the UK economy and those of our trading partners," the CBI and three other trade bodies, the EEF, ICC and techUK, said in the letter.


Separately on Saturday, Don DiMicco, the trade advisor to U.S. presidential candidate Donald Trump, said he would favor Britain over the EU for a trade deal once it left the bloc.

"Absolutely," DiMicco said when asked this in a BBC interview. "They (the British) are our friends, they have always supported us, and we've worked together, and they are leaving the EU in our estimation for the right reasons.

President Barack Obama said before June's referendum that Britain would be at the back of the line for future trade deals after it left the EU, and again last month ruled out the prospect of a rapid deal.

The Telegraph reported on Saturday that Britain's interior ministry planned to allow all 3.6 million EU citizens currently in Britain to stay after Brexit - something the government had previously said was subject to negotiation.

By 2019 most would be entitled to permanent residency under current laws, and it was "a given" that the rest would be allowed to stay too, the newspaper quoted one source as saying.

Another source said: "They will be allowed to remain in Britain. But it is important that reciprocal agreements are made with the EU to ensure that British people abroad get the same rights."

Britain's interior ministry declined to comment specifically on the Telegraph article, but pointed to remarks by May where she said she hoped to secure the rights of EU citizens to stay.

Earlier this week interior minister Amber Rudd said businesses could be required to list the number of foreign staff they hired and train more British ones.

(Reporting by David Milliken; Editing by Stephen Powell)