By Aleksandar Vasovic
BELGRADE (Reuters) - The wartime spokesman of late Serbian strongman Slobodan Milosevic was asked on Thursday to form a coalition government with a nationalist party, raising concerns among diplomats and investors about Belgrade's bid for European Union membership.
Ivica Dacic, head of the Socialist party once led by Milosevic, said after being given the mandate to govern: "There will be no return to the 1990s," the decade when the former Yugoslavia was ripped apart by war.
"As prime minister, I will never make a decision that will be an injustice to Serbia and its citizens," Dacic said after meeting President Tomislav Nikolic, head of the nationalist SNS party with which he will form a coalition.
"The new government's task is to create a better life for our citizens ... and it must stay on a stable European course," Nikolic, a former ultra-nationalist who surprisingly beat liberal Boris Tadic in last month's presidential run-off vote, told reporters.
Diplomats say the EU, which made Serbia an official candidate for membership in March, had hoped Tadic would become prime minister in a coalition with the Socialists, marginalizing Nikolic and keeping the country on a pro-reform path.
But the Socialists rejected proposals to revive a coalition with Tadic's Democratic party after seven weeks of talks and instead sided with Nikolic.
With Nikolic and Dacic in the driving seat, the Democrats lost all levers of power for the first time since they ousted Milosevic in October 2000.
In the 1990s, Dacic was a spokesman for Milosevic, who was handed over to the Hague war crimes tribunal on this day in 2001 and later died in detention while on trial for fomenting wars in the former Yugoslavia.
Under Dacic, the Socialists shed most of Milosevic's legacy but many diplomats see them as opportunists rather than reformers.
As interior minister in the Democrat-led government, Dacic was instrumental in securing visa-free travel for Serbs in the EU and launched a crackdown on organized crime and corruption.
A Belgrade-based European diplomat who asked not to be named said the new government "will be greeted with mixed feelings."
"Dacic proved himself well so far but we want to see whether they can be partners who can deliver," he said.
DREAMS AND DEFICITS
Dacic has in the past expressed support for partitioning Kosovo, the former Serbian province which declared independence in 2008, between Serbia and Kosovo's ethnic Albanians - a scenario unacceptable to the EU.
Brussels has asked Nikolic to mend ties with Kosovo before Serbia can hope for progress in its EU bid.
Nikolic has repeatedly said he is in favor of Serbia joining the EU and wants to speed up the process. However, few in the region have forgotten he once professed a wish to build a "Greater Serbia" - a dream that inspired much of the carnage in the former Yugoslavia in the 1990s in which 125,000 people died.
The new government, which will also include the pro-business URS party, will have to tackle a budget deficit that by far exceeds the 4.25 percent of gross domestic product level agreed with the International Monetary Fund, public debt of over 50 percent of GDP and unemployment around 25 percent.
It will also have to try to unblock a 1 billion-euro ($1.25 billion) stand-by deal with the IMF that was frozen in February over Serbia's inflated spending and widening debt, and also work hard to win the West's trust.
Dacic has said previously Serbia should spend more to spur growth rather than abide by the stringent austerity measures recommended by the IMF.
Diplomats and investors will scrutinize the new government's first moves.
The Serbian dinar which lost ground to the euro immediately after Nikolic's victory and then recovered, weakened slightly against the common currency on Thursday after Dacic said he would form a government.
The currency, which this year lost about 7.6 percent to the European currency, traded at between 115.56 and 116.1 to the euro, currency dealers said.
"Some investors have fled. Some remained cautious and will be awaiting to hear and witness the first economic moves of the new government," said a dealer at a Belgrade-based commercial bank.
($1 = 0.8028 euros)
(Reporting by Aleksandar Vasovic; Writing by Zoran Radosavljevic; Editing by Robin Pomeroy)