Sir Ivan Rogers, who quit in January and accused the UK's top politicians of "ill-founded arguments and muddled thinking" over Brexit, said reports that Brussels officials were preparing an "exit bill" for the UK were "genuine".
Giving testimony to the House of Commons European Scrutiny Committee on Wednesday, he added that senior EU figures believed Britain could not afford to refuse to pay the bill because of the costs of leaving without a deal.
And he said that Brussels was "so leaky" that Brexit negotiations during the two year process of withdrawing under Article 50 of the EU treaties would be very public.
He said the private memo detailed the "street wisdom among the senior players" in Brussels, who thought trade negotiations would not start until late 2017 at the earliest and would not be ratified until the "early-mid 2020s".
Negotiations were likely to descend into "name-calling" and "fist-fighting" before an agreement can be reached, he warned.
He described the scale of the negotiation as "on a scale we haven't experienced probably ever and certainly since the Second World War".
"The view of many will be that the implications for the UK of walking away without any deal on the economic side and without any preferential arrangement and walking into a World Trade Organisation-only world are - from their perspective, which may be a misreading of us - so unpalatable that we won't do it," he told MPs.
UK withdrawal would "explode a bomb" under the EU's seven-year budget, costing poorer countries as much as 12% of the structural funding they receive from Brussels and putting an extra burden on Germany and France to make up the shortfall.
Sir Ivan said an exit payment would be a major priority for the EU, and said Brussels was likely to demand payments from the UK for pensions for officials who served in Brussels during its more than 40 year membership.