The Office for Budget Responsibility (OBR), which provides independent economic advice to the British government, said the economy would lose two per cent in gross domestic product if the UK pulled out of the EU on October 31 without first securing a future agreement.
Both Conservative Party leadership candidates, Boris Johnson and Jeremy Hunt, have kept the no-deal Brexit option on the table.
"Heightened uncertainty and declining confidence deter investment, while higher trade barriers with the EU weigh on exports," said the OBR's report on its no-deal Brexit stress test.
"Together, these push the economy into recession, with asset prices and the pound falling sharply."
"Real GDP falls by 2 per cent by the end of 2020 and is 4 per cent below our March forecast by that point," according to the report cited by Efe news.
Such a scenario would push borrowing up to 30 billion pounds a year and would add 12 per cent GDP to net debt by 2023-24, both projected figures being higher than initially forecast in a report in March.
A no-deal scenario would raise trade barriers and prompt a fall in inward migration and productivity output.
"The imposition of tariffs and the sterling depreciation raise inflation and squeeze real household incomes, but the Monetary Policy Committee is able to cut Bank Rate to support demand," the report said.
It added that the Bank of England could think about lowering interest rates to counter inflation.
The UK had originally been slated to leave the bloc on March 29 but the process was delayed as the outgoing Prime Minister Theresa May failed to get backing for her withdrawal deal.
She is due to be replaced by one of the two leadership contenders by the end of the month.
Whoever takes over the Conservative Party and the office of Prime Minister will have to immediately tackle the issue of withdrawing from the EU. Brussels has until now stood firm that it would not compromise on the withdrawal deal.
The EU's top Brexit negotiator Michel Barnier said the UK would have to "face the consequences" if it decides to quit the bloc without an agreement.
He told the BBC that May's Brexit policy, which failed to make it through parliament three times, was the only way to ensure a smooth departure.
May faced backlash from members of her party who thought her withdrawal deal offered too many concessions to the EU.
( With inputs from IANS )