The predominantly Moslem government force has captured up to 150 square kilometers of territory east and southeast of the town of Bihac, said Lieutenant Colonel Tim Spicer, a peacekeeper spokesman.
Serb troops "withdrew in disarray," enabling government forces to capture at least two tanks and numerous mortars, Spicer said.
Bosnian radio said government forces captured four tanks and dozens of mortars. Serb soldiers set fire to ammunition depots before fleeing, the radio said.
"It is clear the Bosnian Serbs were caught totally off guard," Spicer said.
Close to 5,000 of the Serbs -- mostly women, children and the elderly -- fled either west to a Serbian-held part of Croatia or southeast to the Bosnian Serb town of Bosanski Petrovac, UN and International Red Cross officials said.
The triumph was sure to be a huge morale booster to the long-outgunned government army, which controls only about 30 percent of the country.
Despite some successes in recent offensives across Bosnia, the government army's territorial gains had been relatively limited against the better-armed Serbs.
Spicer said the government success around Bihac, combined with more than a dozen other offensives along a broad front, appears to have forced the Serbs to shift troops and shelve plans for attacks of their own. The Serbs' fuel supplies are believed to be dwindling because of a recent cutoff of aid from their former patrons in Serbia.
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