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All four remaining candidates in the Conservative Party leadership contest have said they are prepared to take Britain out of the European Union without a transition deal to smooth the economic shock if necessary.
In the latest round of voting, Rory Stewart was knocked out of the race, leaving front-runner Boris Johnson, Jeremy Hunt, Michael Gove and Sajid Javid.
Hammond, who supported staying in the EU before the 2016 referendum, said pursuing a no-deal Brexit was fraught with risk and could lead to the opposition Labour Party, under left-wing leader Jeremy Corbyn, taking power.
"I cannot imagine a Conservative and Unionist-led government, actively pursuing a no-deal Brexit, willing to risk the Union and our economic prosperity," the Chancellor of the Exchequer said in excerpts of a speech he was due to deliver later on Thursday (local time).
"And a general election that could put Jeremy Corbyn in Downing Street, to boot," he said.
Calls for an independence referendum in Scotland have grown since the Brexit vote, when a majority of Scottish voters backed remaining in the EU.
An opinion poll published this week showed a majority of Conservative Party members - who will make the final decision on Britain's next prime minister in July - would accept losing Scotland from the United Kingdom as long as Brexit is delivered.
Furthermore, whoever succeeds Theresa May as prime minister will face a continued Brexit impasse in parliament that has led to speculation about an early national election.
In the excerpts of his annual Mansion House speech to leaders of Britain's finance industry, Hammond suggested that a new referendum or a fresh election might be the only way to break the impasse.
"If the new Prime Minister cannot end the deadlock in parliament, then he will have to explore other democratic mechanisms to break the impasse," he said.
Hammond also said emergency interest rate cuts and budget measures to counter the impact of a no-deal Brexit would provide only temporary help for Britain's economy.
"We cannot allow ourselves to be forced to choose between our democracy and our prosperity," he said.
CORBYN BACKS SECOND REFERENDUM ON BREXIT DEAL
Opposition Labour leader Jeremy Corbyn backed a second referendum on any Brexit deal on Wednesday, his strongest support yet for a vote he said must offer "real choices" for those who want to leave or stay in the EU.
Corbyn, an instinctive critic of the European Union, has been under growing pressure to back unequivocally a second referendum to satisfy many members and lawmakers in his party who say it is the only way to break the Brexit deadlock.
He has previously showed his preference for a new national election, almost three years since Britain voted to leave the EU which left both his party and the governing Conservatives deeply split over how, when and whether Brexit should happen.
Corbyn has come under fire for trying to keep both the so-called "Leave" and "Remain" sides of the debate happy by not siding with either camp. His latest shift may ease strains for some, but for others it will be too little, too late.
Addressing his top policy team, Corbyn set out his position more clearly than before: "I have already made the case ... that it is now right to demand that any deal is put to a public vote. That is in line with our conference policy which agreed a public vote would be an option."
"A ballot paper would need to contain real choices for both leave and remain voters. This will of course depend on parliament," he said in a statement.
But in a sign that Labour's discussion over Brexit is by no means complete, Corbyn also called on others in Labour and trade unions to express their views.
"Then I want to set out our views in public," he said.
Corbyn, who led Labour to a much stronger than expected showing in a 2017 general election, has long wanted to move the conversation away from Brexit, seeing his anti-austerity message as a vote winner.
But Labour and the Conservatives were punished in European elections last month, with many of their supporters either turning to a new movement led by veteran eurosceptic Nigel Farage or the pro-EU message of the Liberal Democrats.
That result has prompted soul-searching, with many Labour lawmakers saying the only way for the party to recover is to embrace a second referendum and then campaign to remain in the EU.