By Fatos Bytyci and Matt Robinson
PRISTINA/BELGRADE (Reuters) - Serbia and Kosovo said on Thursday they were close to a deal to end the ethnic partition of the former Serbian province with Belgrade coming under increasing pressure from the European Union as it nears a decision on opening membership talks.
Serbian President Tomislav Nikolic said the two sides were "never closer" to settling their differences, after separate talks with EU foreign policy chief Catherine Ashton in Pristina and Belgrade.
The clock is now ticking till a mid-April progress report by Ashton that will decide whether the EU launches membership talks with Serbia, a major milestone in the country's recovery from Yugoslavia's bloody collapse and a vital signal of stability to much-needed investors.
Majority-Albanian Kosovo declared independence from Serbia in 2008, almost a decade after NATO bombs wrested control of the territory from late Serb strongman Slobodan Milosevic to halt a brutal counter-insurgency war.
But Belgrade retained de facto control over a small Serb pocket of northern Kosovo, and says it will never recognize its former southern province as a sovereign state.
The status of the Serb north, where Kosovo's government has very little presence, is at the heart of EU-mediated negotiations aimed at "normalizing ties" between the two.
Progress on the issue will decide whether the EU opens accession talks with Serbia in June, a process that would drive reform and potentially lure investors to the biggest economy in the former Yugoslavia.
"Right now we are at the beginning of the end in reaching an agreement to normalize relations between the state of Kosovo and Serbia," Kosovo Prime Minister Hashim Thaci, a former guerrilla commander, told reporters after meeting Ashton in Pristina.
"We're optimistic that things are moving in the right direction," he said.
In Belgrade, Nikolic said the EU might circulate a "non-paper" ahead of the latest direct talks between Thaci and Serbian Prime Minister Ivica Dacic in Brussels on March 20.
"We've never been so close to an agreement on how to organize life in Kosovo and to make it possible for all residents there to live as people should live," Nikolic said.
In a significant U-turn in official policy, Serbia's nine-month-old coalition government, an alliance last in power under Milosevic, has offered to recognize the authority of Thaci's government over northern Kosovo, in exchange for autonomy for the Serbs living there.
But the two sides have been at odds for months over the powers any Serb institutions in the north would have.
"We want compromise, but we won't accept humiliation," Dacic said after he and Nikolic met Ashton. "That's our clear message ahead of March 20."
(Writing by Matt Robinson; Editing by Jon Hemming)