BELGRADE -- As the guns have fallen silent in former Yugoslavia, European investors are closely following peace talks in hopes of returning to a market that has been off-limits since war erupted in 1991, analysts say.


Amid predictions of a peace accord in Bosnia this year, rump Yugoslavia has never been so close to winning an end to the international trade embargo which it has blamed for so many of its problems.


But reviving the devastated Serbian economy will take more than the simple lifting of the UN sanctions.


Rump Yugoslavia -- Serbia and Montenegro -- will desperately need an injection of foreign investment to bring its moribund industry back to life.


To do that, Serbian President Slobodan Milosevic will have to convince Western companies that their investments will be safe.


"Investors will be looking for clear indications that free market reforms are under way and that the reforms will not be reversed," Elizabeth Morrisey of Kleiman International Consultants in New York said in a telephone interview.


If a peace accord is signed, sanctions imposed on rump Yugoslavia in 1992 for its armed support of separatist Bosnian Serbs would be suspended and later lifted, diplomats say.


Fighting in Croatia and Bosnia never spilled over into Serbia proper. But Belgrade finds itself in a difficult position, saddled with a large debt, an international image as the villain in the war and the crippling effects of the embargo.


Serbia's gross domestic product has shrunk by 55 percent since 1989 and living standards have plummeted. While Yugoslavia disintegrated, central and eastern European countries were busy transforming their old planned economies.


Winning foreign investment now will be more difficult in the more competitive landscape, and some industries -- such as shipbuilding and steel -- may have to be abandoned altogether, analysts say.


In its favor, Serbia can offer cheap, skilled labor, a market of 10.5 million people and a unique position in the heart of the Balkans.


"Its geographic position is hard to ignore," said Goran Lazovic, an analyst with Banque Indosuez.


Analysts say agriculture, food processing, telecommunications, transport, copper mining, machinery, textiles, and tourism are the country's most promising sectors.


Some resourceful Serb firms have managed to skirt the embargo to a degree, exporting grain, copper and other goods. Sanctions-busting has helped keep some companies afloat, but virtually every sector of the economy has suffered from decay.


Investment in the country's damaged infrastructure will be a high priority for Belgrade.


Once the Security Council votes to lift sanctions, the government expects the World Bank and other international institutions to lend funds needed to finish a north-south highway linking Europe and the southern Balkans.


When it comes to international assistance, Serbia will rank as a much lower priority compared to Bosnia where 3 1/2 years of war caused vast destruction.


Serbian officials and entrepreneurs hope to lure private investment to overhaul the railway line connecting Greece with the rest of Europe.


Diplomats say representatives from French and German transport companies have visited Serbia in the past year to investigate the railway project.


German, French and British telecommunications firms have expressed keen interest in upgrading the country's outdated telephone network as well.


A new opportunity may open up for Serbia depending on the results of an oil exploration study on the Montenegrin coast. The state firm Yugopetrol plans to release results soon from the study of onshore and offshore oil deposits.


After sanctions are suspended, the first hurdle for Serbia will be settling its share of the $11 billion foreign debt left over from the old Yugoslav federation.


"It will be a kind of litmus test," said one Serb businessman in London. Serbia and Montenegro owe about 40 percent of the $4.3 billion commercial debt of ex-Yugoslavia, say analysts at ANZ Grindlays bank. Commercial debt accounts for one-third of the total debt of ex-Yugoslavia.


The sooner Belgrade reaches a debt agreement that gives it some flexibility, the sooner the country can start raising badly needed capital, analysts say.


Serb officials fear the negotiations on commercial and government debt will be colored by politics and that Washington may lobby for a punishing repayment plan. But financial analysts dismiss those concerns.


"The financial community has a remarkably short memory," said Dominic Bokor-Ingram, director at Regent Kingpin fund. "It's in the interest of western Europe and the United States to ensure Eastern Europe is stable from the trade point of view."