Mr Hammond's remarks follow a leaked memo that suggested Brexit Secretary David Davis was "not really interested" in a transitional deal.
But Hammond said there was a growing acceptance that transitional arrangements were needed for business and government.
Hammond said that a transition period would only be possible if there was a "genuine meeting of minds on both sides of the negotiation".
A transitional deal could mean a period of time between Britain leaving the European Union and the finalisation of the new relationship with the bloc - and the pound soared at the news.
Banks in Britain have said their fingers are "hovering over the relocate button" because they still don't have a clear idea of what life after leaving the European Union will look like.
Asked about business calls for a transition period of at least two years following Brexit, Mr Hammond told the committee he expected there to be tension between industry and bureaucratic pressure for a longer changeover and a desire among politicians to get on with the job. Such an agreement would minimize disruption and reduce risks to financial stability, "which must be a fairly real concern", he said.
The Chancellor said there was an "emerging view" the Government will need longer than the two years set out by Article 50 to leave the EU.
Prime Minister Theresa May has said her government would trigger Article 50 of the Lisbon Treaty, which will officially start exit negotiations with the remaining 27 members of the bloc, but a High Court ruling said the move could not be invoked without parliament's approval. The European Commission has said it expects the talks to be completed by October 2018.
Businesses, particularly in the city, are afraid that this isn't enough time to sort out everything that is needed in order to ensure a smooth exit from the EU.
Giving evidence at the Treasury Select Committee, he suggested a transitional deal may be required to prevent a sudden "cliff edge" change in trade arrangements which could cause financial instability both in the United Kingdom and across the continent.
As an example, he warned that if the United Kingdom left the European Customs Union under a "hard Brexit", the country could face a fivefold increase in border checks, costing hundreds of millions of pounds a year.
He said Whitehall "has had to think about how long it takes to make changes, hire people, train people, introduce IT changes".