He said Brussels "continues to insist" on the possibility of a customs border down the Irish Sea.
The PM stressed that the government must not let the backstop issue disagreement "derails the prospects of a good deal", leaving the country with "a no deal outcome that no-one wants".
Mr Raab's office said: 'With several big issues still to resolve, including the Northern Ireland backstop, it was jointly agreed that face-to-face talks were necessary'.
"But that shouldn't hide the fact that we still have some big differences left to resolve", Hammond said. The EU leaders must also back the deal and then so must the British and EU parliaments.
The "backstop" refers to an agreement to protect an open border between Ireland and Northern Ireland.
But they have dramatically different idea on how the mechanism would work. May claims that this would not be allowed under the terms of the amendment to the customs bill passed in July and that she wouldn't accept a backstop that would go on indefinitely.
However, Tory Brexiteers fear that she is about to concede to European Union demands that it must be open-ended, despite previous assurances from ministers it would have to be time-limited.
The transition extension would nearly certainly ensure that the Brussels backstop proposal, where Northern Ireland remains within the EU's customs union and single market after Brexit, will never be enacted.
Government sources said there was a "real problem" to be overcome.
A government source told AFP that the European Union is now asking for a second backstop to be put in place, very similar to their earlier proposal involving just Northern Ireland, in case the British version is not ready in time.
Negotiations were paused on Sunday after the two sides failed to agree on how to deal with the United Kingdom's only land border with the EU.
The EU's suggestion would see Northern Ireland remain aligned with Brussels' rules, thus varying from the rest of the UK.
During the parliamentary session, key Brexiteers, including former party leader Iain Duncan Smith, sought to pin her down on a commitment to an absolute deadline for any backstop to end, which Mrs.
"In presuming to change the constitutional arrangements of the United Kingdom, the European Union is treating us with naked contempt", he wrote in his weekly column in the Telegraph newspaper.
Britain refuses to be pinned down on a date for a fixed Brexit deal.
And she sought to reassure critics of her approach that the United Kingdom would not end up in "permanent limbo" tied to European Union customs rules.
Mrs May appealed for MPs to hold their nerve as she ran the gauntlet of the Commons in the wake of the debacle.
Of the latest developments in the Brexit negotiations, she said the talks were entering the "final stages", a comment which prompted laughter from some MPs. 'This is the time for cool, calm heads to prevail.
"There are a few issues that remain to be ironed out and the overarching principle of the discussions remains that nothing is agreed until everything is agreed".
But Mrs May added that she would not tolerate the proposals for a "backstop to the backstop".
"There was always going to be a moment like this, but we should remember that a huge amount of progress has been made".
Remainer Dominic Grieve described the proposed implementation period as a "condition of vassalage" as he told Theresa May he would vote against her plans unless they were "put to the British people again".
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