Jobs and living standards must come first as the UK negotiates its exit from the EU, Philip Hammond has said.
The chancellor said it would require "every ounce of skill and diplomacy" to get the right deal, warning that people didn't vote for Brexit to be poorer.
Speaking in London, he said changes to customs arrangements should be phased in and there should be transitional measures to protect key industries.
Labour said the chancellor was seeking to "distance himself" from Theresa May.
Mr Hammond's speech came as ministers deny the UK had caved in over the timetable for Brexit talks.
As the process began on Monday, the EU's chief negotiator Michel Barnier said the two sides had agreed to discuss the details of the UK's exit - such as the rights of citizens and any so-called "divorce bill" - before moving on to the UK's post-Brexit relationship with the EU.
The UK has always maintained that the two issues go hand in hand and should be dealt with simultaneously.
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In his first major speech since the Conservatives failed to win a majority in the general election, Mr Hammond set out his priorities for the Brexit negotiations, placing the needs of the UK economy and businesses front and centre.
While the talks had got off to a promising start, he warned they would get "tougher" and the remaining 27 EU members would have their own agenda.
"The future of our economy is inextricably linked to the kind of Brexit deal we reach with the EU over the next 20 months," he told an audience of City leaders at the Mansion House.
By Economics Editor Kamal Ahmed
Philip Hammond said that no-one voted for Brexit to become poorer.
He also made it clear that he wants to put the economy at the heart of the Brexit negotiations. Rather than sovereignty or controlling immigration, which are the issues likely to motivate other colleagues in the Cabinet and certainly in the Conservative Party.
The tensions are clear. The chancellor - strengthened since the general election - gave the greatest detail yet about what his approach might mean for our future relationship with the EU. Yes, as he said at the weekend, the UK will be leaving the customs union.
But he made the case for a new form of customs agreement with "current border arrangements" - which presumably means agreeing to some form of EU oversight for some years following Britain's exit from the union. Read more
He added: "I am confident we can do a Brexit deal which puts jobs and prosperity first, that reassures employers that they will still be able to access the talent they need, that keeps our market for goods, services and capital open, achieves early agreement on transitional arrangements so trade can carry on flowing smoothly.
"The collective sigh of relief would be audible. The benefit to our economy would be huge."
Mr Hammond said every sector of the British economy, whether it be the car industry, pharmaceuticals or financial services, were dependent on a "smooth" transition to a post-Brexit world that was underpinned by a "comprehensive" free trade agreement in goods and services.
A deal "that protects jobs, prosperity and living standards in Britain will require every ounce of skill and diplomacy we can muster", he said, claiming that any alternative outcome would not be "delivering on the instructions" given by the public when they voted Leave in last year's referendum.
Border checks
Mr Hammond said the UK still planned to leave the single market and customs union despite calls for a rethink from business after the inconclusive election result. But he said border checks - particularly in Ireland - must remain as "frictionless as possible" as the UK moved to a different system.
"To do this in the context of our wider objectives will be challenging... It will almost certainly need an implementation period, outside the customs union itself but with current customs border arrangements remaining in place until new long-term arrangements are up and running."
The Irish land border is a major pre-occupation of the Brexit talks
Leaving the EU, he added, could not be to the detriment of investment, enterprise or increased productivity - which he said held the key to the UK's future economic growth and the government's ability to pay for increased funding for public services at a time of growing "weariness" over austerity.
"I thought we had won that argument. But I learnt in the general election that we had not. That we must make anew the case for a market economy and for sound money, the case for growth, we need to explain again how stronger growth must be delivered."
Barry Gardiner, the shadow secretary of state for international trade, said Mr Hammond had "swallowed Labour's playbook" by backing a "jobs-first Brexit, fair and managed migration and no deal being a bad deal".
"He has adopted the very wording," he told the BBC's Daily Politics.
Conservative MP Stephen Hammond told BBC Radio 4's The World at One there was a "changed dynamic" around Brexit since the general election, saying voters accepted the UK was leaving the EU but wanted to ensure the economy was protected.
His fellow Tory MP Iain Duncan Smith, a leading voice in the campaign to leave the EU, said the chancellor's speech was "fine", with little he disagreed with.
He agreed a short period of "interim measures" would be needed.
Speaking earlier on Tuesday, Transport Secretary Chris Grayling denied the UK had effectively conceded to the EU's timetable for talks - which will see discussions on a future trade deal come after those on the terms of exit.
"We've agreed to talk about the rights of EU citizens, which we've been saying all along was a top priority for us; something to deal with right at the start," he told BBC Radio 4's Today.
"We are also talking about the issue of the Irish border; that's a real priority for us. So as far as we're concerned we are dealing with things that are absolutely at the top of our list right now, and that people will expect to be on the top of our list."
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