The liberal politician said that Theresa May had "faced up to reality" with her announcement this week that Britain will leave the single market, but added that the decision to take back control of the country's borders will have "consequences" on both sides of the channel.
Speaking at a session of the World Economic Forum in Davos, Mr Rutte warned other European countries that that is no way to control immigration without risking the economic fallout from quitting the bloc.
And he also blasted Mediterranean countries – particularly Italy and France – for putting the entire euro currency at risk of collapse by failing to properly implement Brussels-imposed austerity.
The Dutch PM, who faces the possibility of being ousted by eurosceptic politician Geert Wilders in his country's next general election in March, made the comments during a panel discussion on the future of the EU which also featured former EU Parliament president Martin Schulz.
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Dutch PM Mark Rutte said Britain will pay a 'huge price' for Brexit
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Mr Rutte made the remarks during a panel discussion in Davos
PA
Theresa May said Britain will forge a new place in the world after Brexit
He said: "Theresa May faced up to reality in her speech, but it also means that the UK is now making a choice to control migration.
"And they are paying a huge price because the economic growth rate of the UK will be impacted negatively by the fact that they will leave the biggest market in the world.
"So they are willing to pay the price, but this has consequences for the rest of Europe and particularly for the UK. It is the price between wanting to control migration and accepting the fact that it will have a huge impact on the economic growth rate."
Defending the EU project, he then added: "We need to be very clear about why we need Europe at the moment. There is need for a European Union which creates jobs and economic security for the future, that's clear."
The UK will be impacted negatively by the fact that they will leave the biggest market in the world
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Dutch PM Mark Rutte
Mr Rutte also bashed his fellow EU member states over the crisis facing the euro, saying the single currency "saved" his country from catastrophe during the 2008 financial crisis but is now in jeapordy because of lax financial controls in Mediterranean states.
France and Italy have furiously resisted Brussels-imposed austerity measures designed to slash their debt to GDP ratios, which they say have had a devastating impact on economic growth and unemployment.
But the Dutch PM accused them of dragging the euro down, blasting: "The euro is in difficulty because too many countries are not doing what was promised and implementing reforms.
"Too many countries, particularly in the south of Europe, are not doing that and that is creating a fundamental mistrust in Europe particularly between the north and the south."
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Politicians and celebrities tweet their reaction as Theresa May unveils her 12 point plan for Britain leaving the EU.
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The British Prime Minister Delivers Her Brexit Speech
Asked what his one hope for the coming year was, he added: "For France and Italy to implement reforms. That's crucial and if they don't do this my worry is that Europe will be in very difficult circumstances."
His outburst demonstrates the growing divide between rich northern countries and poorer southern member states over how to break out of a period of sluggish economic growth and improve the fortunes of the struggling bloc.
It comes after Mrs May used her speech to world leaders at the exclusive business conference in Switzerland to insist that Britain will forge a new path in the world after leaving the European Union, seeking new trade deals with countries across the globe.
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