Serbia and Montenegro in New Union

Europe was celebrating a rare success in the Balkans last night after brokering a new union between Serbia and Montenegro to replace federal Yugoslavia and avoid another war in the continent's troubled south-eastern corner.

"We have taken an important step forward for the stability of the region and of Europe," the EU's foreign policy chief, Javier Solana, said in Belgrade after signing a draft constitutional framework with the leaders of the two republics.

Montenegro's president, Milo Djukanovic, agreed to a three-year moratorium on a referendum that could have led to secession for his tiny republic and pledged instead to recast Yugoslavia as a union called "Serbia and Montenegro".

If the deal is implemented, the land of the southern Slavs, created from the ruins of the Austro-Hungarian empire, will cease to exist, but without disintegrating into unstable parts as it did over the secession of its former constituent republics, including Bosnia and Croatia.

But Mr Djukanovic has to overcome opposition from political allies and voters who want full independence, which EU governments fear would encourage violent secession by ethnic Albanians in Kosovo and Macedonia, and by Serbs in Bosnia.

Mr Djukanovic and Yugoslavia's president, Vojislav Kostunica, will meet EU leaders including Tony Blair at the Barcelona economic summit today.

Serbia and Montenegro, the only two of Yugoslavia's six republics not to break away since Marshal Tito's federation started to unravel along ethnic lines in 1991, will now draft a new constitution.

Mr Solana has been able to play on hopes in Belgrade and Podgorica for trade links, economic aid and closer ties with Brussels that could develop into membership of the union.

Mr Kostunica said the new state would embody a break with the former regime under Slobodan Milosevic, who is standing trial in the Hague for war crimes. "At a time when Europe is integrating, and when the pestilence of disintegration is affecting the Balkans, Serbia and Montenegro have embarked on the road of integration," he said.

Yesterday's deal represents a second success for the EU in the Balkans after last August's peace deal to end nascent civil war in the former Yugoslav republic of Macedonia.

"It's amazing," said one official. "Two years ago we were bombing them."

Under the agreement, Serbia and Montenegro will be semi-independent states that will, for now, share a defence and foreign policy. They will run separate economies, currencies and customs services.

Mr Kostunica is to remain federal president and the new country will have one seat in the United Nations.