By Adrian Croft and Justyna Pawlak
BRUSSELS (Reuters) - Serbia won the green light on Friday to start negotiations by January on joining the European Union, capping a remarkable transformation in the prospects of the former Yugoslavia since the wars of the 1990s.
The decision, taken at an EU summit, rewards Belgrade for an April deal to improve relations with its former province of Kosovo, which broke away from Serbia in a 1998-99 guerrilla war.
EU leaders also agreed Brussels should launch negotiations with Kosovo on a so-called association agreement, which covers trade, economic and political relations and is a step on the path to eventual EU membership.
The leaders agreed talks with Serbia - long treated as a pariah because of its central role in the wars that tore through the Balkans after the 1991 collapse of Yugoslavia - would start in January 2014 "at the very latest".
"We are at a historic moment for the Balkans and for Europe as a whole," European Council President Herman Van Rompuy told a news conference, noting that the decisions on Serbia and Kosovo came as Croatia prepares to join the European Union on Monday.
"These ... decisions are an immediate result of the courageous agreement Belgrade and Pristina reached last April," said Van Rompuy, who will travel to both capitals on Monday.
Serbia and Kosovo have been at odds since Kosovo seceded in 2008 with Western backing. After months of EU-brokered talks, the two sides reached an agreement in April aimed at ending the virtual ethnic partition of Kosovo between its ethnic Albanian majority and a pocket of some 50,000 Serbs in the north.
The agreement still has to be fully implemented, and EU governments will assess progress before giving a final go-ahead to talks later this year.
The EU negotiation process should help drive reforms in Serbia, the largest country to emerge from the former Yugoslavia, luring investors to its ailing economy.
"There's a lot of work ... ahead of us, a lot of energy which we will have to invest, but there will be no more blood, no returning to the past, no troubles and torments we had to endure over more than 20 years," Serbian Defense Minister Aleksandar Vucic was quoted by the Belgrade-based Beta news agency as saying just before the EU decision.
The Serbian dinar swung upwards to 113.5 to the euro after the EU agreement, from a low of 114.05 earlier in the day, currency traders in Belgrade said.
Mladen Dodig, head of research at Erste Bank in Serbia, said the date for EU membership talks would be a major support for reforms and improvement in the business climate, and would boost investor confidence and foreign investment.
"This will have a stabilizing effect for financial markets and the foreign currency market, but I also expect structural reforms," said Miladin Kovacevic, the deputy head of the Serb Statistics Office.
NATO Secretary-General Anders Fogh Rasmussen welcomed the EU's decision and said KFOR, the NATO-led Kosovo peacekeeping force, would "continue to play its role by ensuring a safe and secure environment for all people in Kosovo."
The peacekeeping force, in Kosovo since June 1999, comprises 5,000 troops from 31 countries.
Serbia has its sights set on joining the EU as soon as possible. Prime Minister Ivica Dacic said this week he hoped it could wrap up membership talks in four or five years, although the widely held view in Brussels is that it is unlikely to be admitted before 2020.
In the past few years, Serbia has made notable strides towards the EU thanks to progress on democratic reforms and the capture of fugitives wanted for crimes during the Yugoslav wars.
Serbs consider Kosovo the fount of their nation and Orthodox Christian faith, but Belgrade lost control over the territory in 1999 when NATO conducted 11 weeks of air strikes to halt the killing and expulsion of ethnic Albanian civilians by Serbian security forces waging a counter-insurgency campaign.
Kosovo is now recognized by 100 nations, including the United States and 22 of the EU's 27 members.
Of Serbia's fellow ex-Yugoslav republics, Slovenia joined the EU in 2004, Croatia follows on Monday and tiny Montenegro began membership talks last year. Macedonia is a candidate, while Bosnia has yet to apply.
(Additional reporting by Aleksandar Vasovic in Belgrade and Ethan Bilby in Brussels; Editing by Mark Trevelyan)