The accord, drafted at the Yugoslav peace summit in the United States and signed Sunday, headed off what appeared to be an imminent Croatian army offensive to retake the Serb-held Eastern Slavonia enclave. Such an attack, if it had gone ahead, would have upset efforts to forge a wider Balkan peace.
Minority Serbs seized 30 percent of Croatia in a 1991 revolt against the republic's secession from Yugoslavia that unleashed the violent breakup of the Balkan federation.
This summer, the Croatian army retook two Serb enclaves, all but a fraction of breakaway lands, in blitz attacks over UN truce lines.
Last week Zagreb massed troops facing holdout Eastern Slavonia and mediation efforts were accelerated.
"This is the beginning of the end of the wars in former Yugoslavia," UN mediator Thorvald Stoltenberg said of the new agreement. "I believe it will have a contagious effect leading to an overall peace in former Yugoslavia."
The accord signed by local Serb leaders and the Croatian government provides for the return of the strategic enclave on the Danube River border with Serbia to Zagreb's control after a year under international military authority.
The interim period, designed to enable 90,000 Croat refugees to safely reoccupy homes and get Serbs and Croats used to coexistence, can be extended to two years if one side requests it -- a concession to Serb wishes.
Eastern Slavonia, prized for its rich grain fields and oil and natural gas reserves, would be demilitarized except for an "international force" moving in to police the transition. UN sources said the UN Security Council was expected to meet soon to decide on the composition of the force. UN peacekeepers now patrol ceasefire lines frozen in 1992.
The senior Croatian official who signed the accord praised the rebel Serbs for finding "wisdom" after refusing for years to negotiate on "peaceful reintegration" following Croatia's secession from Serbian-led Yugoslavia.
Hrvoje Sarinic, top aide to President Franjo Tudjman, said the pact would be a cornerstone of eventual diplomatic relations with rump Yugoslavia.
But behind the scenes of official optimism, sources conceded the agreement would be a challenge to implement.
They admitted that opposing armies may be reluctant to demilitarize the area given intense mutual suspicion and the emotional desire of many Croats to avenge a 1991 Serb takeover marked by brutal siege warfare and mass expulsions.
"I think demilitarization will be one of the real difficult parts of this agreement," a senior UN official said.
What sort of international force will take charge could also prove problematic. The Serbs want another UN force while Croatia seeks a robust NATO contingent to succeed peacekeepers reviled by many Croats for tolerating a long rebel occupation.
There is also concern that many Serbs now inhabiting Eastern Slavonia could flee during the transition, defeating the purpose of an agreement to reconcile ethnic neighbors as an example to Bosnia's estranged factions.
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