In his annual speech to the City of London chiefs, the Tory Cabinet minister warned that a drastic reduction in new arrivals could damage the economy and undermine job creation.
Instead, he called for a "jobs first" Brexit that prioritises British jobs and "underpins Britain's prosperity".
And he also raised the possibility of a temporary transition period with the UK staying in the EU Single Market for several years after formally leaving the bloc to give British businesses time to adjust to the new arrangements.
Immigration must not be 'shut down' after Britain leaves the EU, says Chancellor Philip Hammond
Critics today seized on Mr Hammond's remarks in his annual Mansion House speech as fresh evidence of a rift between the Treasury and Downing Street.
So while we seek to manage migration, we do not seek to shut it down
Chancellor Philip Hammond
They claimed the Chancellor wanted a less radical break with Brussels that prioritised economic growth over tighter border controls.
But Euro-sceptic Tory MPs welcomed his words as sign that the Government is pressing ahead with delivering Brexit including ultimately leaving the EU's Single Market and customs union.
Mr Hammond delivered his Mansion House speech early today after the address was postponed last week following the Grenfell Tower blaze.
Hammond raised the possibility of a temporary transition period
He promised not to turn a "blind eye" to the growing backlash among voters against the global economy and mass immigration.
But he added: "We are not about to turn inward. But we do want to ensure that the arrangements we have in place work for our economy.
"Just as the British people understand the benefits of trade, so too they understand how important it is to business to be able to access global talent and to move individuals around their organisations.
"So while we seek to manage migration, we do not seek to shut it down."
Mr Hammond insisted the economy must be a priority in Brexit talks, noting that British people "did not vote to become poorer" in last year's in-or-out EU referendum.
He said: "We recognise that this is a negotiation, and our negotiating counterparts, while broadly sharing our desire for a close ongoing relationship, will have their own priorities. So we must be clear about ours.
"I have said before, and I remain clear today, that when the British people voted last June, they did not vote to become poorer, or less secure.
"They did vote to leave the EU, and we will leave the EU, but it must be done in a way that works for Britain, in a way that prioritises British jobs, and underpins Britain's prosperity.
Brexit talks 2017: Day one of Brexit negotiations latest pictures Mon, June 19, 2017
The first stage of the negotiations concerns the fate of European expatriates in the United Kingdom and Britons settled in Europe
EPA 1 of 11
David Davis and Michel Barnier give a press conference at the end of a meeting at EU Commission in Brussels
"Anything less will be a failure to deliver on the instructions of the British people."
Mr Hammond wanted a "Brexit for Britain" that delivered a free trade deal with the EU, a transitional arrangement to "to avoid unnecessary disruption and dangerous cliff edges" plus "frictionless customs arrangements" for cross-border trade and "crucially" to maintain the "open and free-flowing" Irish border.
He said: "To do this in the context of our wider objectives will be challenging.
"It will almost certainly involve the deployment of new technology.
"And therefore we'll 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."
Former Tory Cabinet minister Iain Duncan Smith backed Mr Hammond's "fine" and "straightforward" speech, saying he did not find much to disagree with.
He told Radio 4's World At One: "Rather than transitional as a word which doesn't really describe things, I think actually what we should be talking about here is interim measures.
"And they have always been a likely necessity because as you reach an agreement within the two-year period you will need to have interim arrangements until you get to the final point of what you have agreed.
Former Tory Cabinet minister Iain Duncan Smith
"So, you will want as Philip Hammond said, we're leaving the customs union but we'll also want to make sure in that short period afterwards, that actually you are able to continue trading.
"After all, there shouldn't be an issue about this because we are based on the same regulations on the same issues as they are in the European Union right now."
Mr Duncan Smith rejected claims that the Chancellor wanted a so-called "soft Brexit", keeping many elements of EU membership after departure.
He said: "I don't understand what soft Brexit is nor do I understand what a hard Brexit is.
"Philip Hammond spelt out today what we consider to be our Brexit plan."
Tory former minister Stephen Hammond said there would not be civil war in the party over Brexit, adding: "The balance within the party is clearly there for a sane exit from the European Union."
But Labour's shadow chancellor John McDonnell claimed the Mansion House speech laid bare a rift over Brexit within ministerial ranks.
He said: "We have seen the Chancellor again trying to distance himself from the position of his Prime Minister on Brexit.
"It just shows further disarray at the top of government.
"The fact that there is clearly such a serious split between Number 10 and 11 is very worrying and only helps to undermine our country ahead of the Brexit negotiations.
“It further shows just how weak a position Theresa May is in. And raises the serious question of: how can she negotiate Brexit when her own Chancellor is so publicly disputing her position on Brexit and briefing against his own Cabinet colleagues?"
TheCityUK, a lobby group for London's powerhouse financial sector, praised Mr Hammond's approach to immigration and Brexit.
Labour's shadow chancellor John McDonnell
Its chief executive, Miles Celic, said: "The Chancellor was right to point out that the fragmentation of financial markets, and the financial ecosystem which exists in the UK, would leave everyone poorer.
"As he said, avoiding this outcome is a huge prize and must be a core focus of any new agreement with the EU.
"With Brexit negotiations under way, it is reassuring to hear the Chancellor reinforce the need for a transitional period.
"We have consistently called for bridging and adaptation periods to be a critical part of a Brexit deal to ensure continuity of service to customers here in the UK and across the EU, and to enable business enough time to adapt to the new relationship."