Iain Duncan Smith has joined other Eurosceptics in attacking the Chancellor over his statements that the UK will stay in the single market after it leaves the EU.
Philip Hammond was asked whether the UK would remain subject to the jurisdiction of the European Court of Justice and participate in the single market and customs union, during the transition phase after Brexit.
The Chancellor said: "In a word, yes."
Mr Duncan Smith added his voice to those of others like Peter Bone MP who criticised the Mr Hammond for making a statement that was "not government policy".
The former work and pensions secretary said: "The Prime Minister made it clear in the House of Commons on Monday that the purpose of the implementation period is to implement progressively what has been agreed.
"The Chancellor's comments today are not government policy, which he should stick to. As it is, he is undermining the Prime Minister's negotations with the EU."
The Chancellor, speaking on a visit to China, indicated the Government would accept EU proposals for a Brexit transition period, despite earlier concerns raised by some Conservative Eurosceptics.
On Friday, the EU published a document which set out the process of agreeing the terms of transition, which made clear the UK will be expected to observe all EU rules during the period, including on freedom of movement, and be barred from making independent free trade deals.
Throughout that period, the EU said the UK would have no role in the setting of the rules.
Outlining the likely contours of the implementation period, Mr Hammond told businesses what to expect.
He said: "What they should expect as a result of the agreement we've reached this week with the European Union is a transition, or implementation period, which will start at the end of March 2019, during which we will no longer be members of the European Union, we won't technically or legally be in the customs union, or in the single market.
"But we're committed, as a result of the agreement we've made this week, to creating an environment which will effectively replicate the current status quo so that businesses can carry on trading with their commercial partners across the European Union, as they do now.
"Borders will operate as they do now, and financial service businesses will be able to carry on conducting their business across borders as they do now."
When pressed on whether the Government would have a say in EU decision-making during the period, the Chancellor responded: "We won't be members of the European Union, and therefore we won't sit in the European Council or any of its subordinate bodies, and we won't have a vote."
Pro-Brexit MP Peter Bone told Sky News: "I'm not sure where the Chancellor is coming from. What he seems to be repeating is all the things the EU is demanding. Before the negotiations have even started.
"That can't be possibly right. It may be that the Chancellor is a bit jet lagged in China or something. But it doesn't seem to be government policy and the Prime Minister needs to slap him down on it."
Former Brexit minister David Jones MP told Sky News what the Chancellor said "looks awfully like a capitulation," adding: "Our negotiating position needs to be agreed, not made up on the hoof."
Following the EU Council's decision to declare "sufficient progress" had been made in the first phase of negotiations, the talks between David Davis and Michel Barnier can now progress on next month to discussing the terms of the transition period, before turning to the future trading relationship in March.
On Tuesday, the Cabinet is expected to hold its first detailed discussions about what future trading relationship the Government will seek.
But what were already likely to be difficult conversations could be made more complicated if there are divisions over the nature of the implementation period.
Environment Secretary Michael Gove is understood to be keen that the UK leaves the EU's Common Agriculture Policy and Common Fisheries Policy during any transition period.
The EU's transition proposals would also mean International Trade Secretary Liam Fox would be unable to finalise bilateral trade deals until at least 2021.