Northern Ireland Secretary James Brokenshire has told MPs he believes a deal to restore power-sharing at Stormont “remains achievable”.
The Tory frontbencher said further progress had been made in recent days on issues like language, culture and identity.
And he insisted if an agreement is reached, legislation to enable a new executive could come “as early as this week”.
But he warned the current “hiatus” could not go on “for much longer”.
He also said if no deal was agreed, legislation in Westminster could be required to give authority for the spending of Northern Ireland departments through an appropriations bill.
Mr Brokenshire added: “We have not quite reached that critical point yet, but that point is coming, and the lack of a formal budget is not something that can be sustained indefinitely.”
His comments stopped short of threatening a return to direct rule from London in the short-term, but emphasised the clock is ticking.
The minister delivered the update in the House of Commons after last week’s deadline to secure an agreement passed.
As he spoke, the Stormont parties continued to blame each other for the impasse.
Northern Ireland has been without a functioning devolved government since January when the DUP Sinn Fein coalition broke down over a green energy scandal.
The SNP’s Deidre Brock said it was “disappointing” an agreement had not been achieved.
She asked Mr Brokenshire: “Will you accept that your party’s (£1billion) deal with the DUP makes reaching a deal more difficult?
“The murk that surrounds this whole affair at times makes it increasingly difficult to trust there is true impartiality in the government.”
Rejecting her analysis, the minister replied: “We stand full square by our undertakings under the Belfast Agreement and its successors and the agreement relating to decision-making here at Westminster does not contravene those very important elements.”
Meanwhile, Labour urged Theresa May to travel to Belfast in an effort to resolve the situation.
Shadow Northern Ireland secretary Owen Smith said it was encouraging the prime minister had picked up the phone to the leaders of the DUP and Sinn Fein last week, but suggested she “could do a bit more”.
Under the terms of the Good Friday Agreement both sides must share power.
The only alternatives if a deal is not struck are another assembly election or direct rule.