By Justyna Pawlak and Adrian Croft
LUXEMBOURG (Reuters) - The European Commission encouraged EU governments on Monday to start membership talks with Serbia, in recognition of Belgrade's accord with Kosovo last week that marked a milestone for the Balkans' recovery from the collapse of Yugoslavia in the 1990s.
Talks could start within the year - if all European Union capitals agree at a meeting in June - provided Serbia puts in place all the conditions of the deal meant to address the status of the Serb-populated northern part of its former province.
"It's a game changer for Serbia and Kosovo, it's a game changer for the whole region of the western Balkans," EU commissioner for enlargement Stefan Fuele told reporters in Luxembourg where EU ministers discussed Serbia's EU path.
The negotiation process would help drive reforms in the largest country to emerge from federal Yugoslavia, luring investors to its ailing economy.
The EU executive said Belgrade had met a key condition of visible and sustainable improvement in relations with Kosovo, which broke away from Serbia in a war in 1999 and declared independence with Western backing in 2008.
Racing to clinch accession talks, Serbia last week agreed to cede its last foothold in Kosovo, in a pact aimed at ending the ethnic partition of the young country between its Albanian majority and a pocket of some 50,000 Serbs in the north.
The north Kosovo Serbs have threatened to resist integration with the rest of Kosovo, in a region bristling with weapons and deep animosity. Some 5,000 Serbs protested in the divided Kosovo town of Mitrovica on Monday.
For Kosovo, the agreement means the EU may now start discussions on an association agreement, which can carry some economic benefits.
"It is now crucial that the agreement is put into practice so that the next steps in (Serbia's) convergence to Europe can be seen," German Foreign Minister Guido Westerwelle said.
"Implementation will not be entirely easy, but I think the Rubicon has been crossed," said Swedish Foreign Minister Carl Bildt, a former United Nations and EU envoy in the region. "There is no way back."
Serbia's refusal to come to terms with the loss of its southern province has held back domestic reform, fuelled instability and slowed investment in arguably the most promising economy in the former Yugoslavia.
Last week's deal represents a sharp reversal of official Serbian policy, as the coalition government seeks the economic boost of closer EU ties.
Serbs consider Kosovo the cradle of their nation and Orthodox Christian faith, but Belgrade lost control over the territory in 1999 when NATO carried out 11 weeks of air strikes to halt the killing and expulsion of Albanian civilians by Serbian forces waging a counter-insurgency campaign.
Kosovo has been recognized by more than 90 countries, including the United States and 22 of the EU's 27 members.
Serbia says it will never recognize Kosovo as sovereign, but last week agreed to cede its fragile control over the north Kosovo Serbs to the Kosovo authorities in Pristina, in exchange for limited autonomous powers. Serbia also pledged not to obstruct Kosovo's path to eventual EU membership.
"This is an historic agreement," said Dutch Foreign Minister Frans Timmermans. "It is another step towards lasting peace in the Balkans. I am very positive about this step," said.
Serbia is unlikely to join the EU before 2020.
Of its fellow ex-Yugoslav republics, Slovenia joined in 2004, Croatia follows on July 1 and tiny Montenegro began membership talks last year. Macedonia is a candidate, Bosnia has yet to apply.
(Additional reporting by Martin Santa in Brussels, Ilona Wissenbach in Luxembourg and Matt Robinson in Belgrade; Writing by Matt Robinson and Justyna Pawlak; Editing by Robin Pomeroy)