By Adrian Croft
BRUSSELS (Reuters) - Crunch talks aimed at ending the ethnic partition of Serbia's former Kosovo province broke up without result on Wednesday, in a major setback for Serbia's hopes of starting European Union membership negotiations this year.
EU foreign policy chief Catherine Ashton, who has been mediating months of talks between Serbia and Kosovo, said the gap between the two sides was "very narrow, but deep" after a marathon 12-hour session.
Ashton said the Brussels meeting, the eighth between the prime ministers of Serbia and Kosovo, was the last time all sides would meet formally with EU mediation. The talks have been aimed at "normalizing ties" five years after Kosovo declared independence with the backing of the West.
"They will now both go back and consult with their colleagues in their capitals and will let me know in the next few days of their decision," Ashton said in a statement, leaving open the slim chance a deal might still be reached.
Ashton will issue a progress report in mid-April, which will form the basis of an EU decision in June whether to launch membership talks with Serbia - a crucial stimulus for reform and signal of stability for investors looking to the biggest economy in the former Yugoslavia.
Kosovo declared independence from Serbia in 2008, almost a decade after NATO went to war to halt the killing and expulsion of ethnic Albanian civilians during a brutal Serbian counter-insurgency campaign in what was then a Serbian province.
Serbia does not recognize the secession, but is under pressure from the West to establish functional relations with Kosovo and loosen its grip on a northern, Serb-populated pocket of the young country.
The de facto ethnic partition between Kosovo's Albanian majority and the ethnic Serb north has been at the heart of the Brussels dialogue and stands in the way of Serbia's further progress towards EU membership.
Both Serbian Prime Minister Ivica Dacic and his Kosovo counterpart, former guerrilla commander Hashim Thaci, said there was still time left.
"This isn't the end; there will be more talks in Belgrade," Dacic told reporters. "We have some more time to reach a solution and to gather our thoughts after these long talks."
Thaci mooted the possibility of another meeting next week, "if Serbia accepts the principles," although he did not elaborate where the talks might take place or under whose auspices.
"We hope they will use the time in the coming days for sincere reflection," Thaci told reporters. "I remain hopeful an agreement can be reached."
In a major concession as it seeks the economic boost of closer EU ties, Serbia has offered to recognize the authority of the Kosovo government over the Serb-populated north, but it wants autonomy for the 50,000 Serbs living there.
Dacic and Thaci are at odds over the powers the Serb north should wield, particularly whether it would have its own judicial system and police.
(Additional reporting and writing by Matt Robinson; Editing by David Brunnstrom)