Failure to arrest an indicted general is threatening Croatia's European Union membership bid, dimming hopes that it could be the first of war-ravaged Yugoslav republics to join and become a beacon for the rest.

Chances of a nationalist bloc returning to power in November 23 elections only further complicate the picture, diplomats said on Thursday.

The predicament of Croatia -- hailed as a possible model of reforms in the troubled Balkans -- shows the extent to which the United Nations war crimes tribunal and its chief prosecutor Carla del Ponte weigh on their membership hopes.

"Carla del Ponte had some fairly strong things to say and we take our cue from her," said European Commission External Relations spokeswoman Emma Udwin, confirming that Zagreb's membership bid hinged on its compliance with the tribunal.

General Ante Gotovina -- for many Croatians a hero of the 1991-95 war of independence -- has been on the run since his indictment for atrocities during and after the government's 1995 offensive against rebel Serbs, was made public in July 2001.

Del Ponte insists he is hiding in Croatia, aided by state and intelligence officials, while Zagreb claims not knowing where he is.

The Netherlands and Britain have refused to ratify an EU associate membership accord until they are convinced.

The West also desperately wants to nab fugitive Bosnian Serb wartime leader Radovan Karadzic and his military chief Ratko Mladic, and cannot "give Zagreb a free ride," said an EU diplomat based in Zagreb.

"It will be very difficult for the Commission to come to a positive conclusion unless Gotovina is arrested or unless the Netherlands and Great Britain ratify," the diplomat said.

Although Croatia's hopes to get a green light to start accession talks next year have been dampened, financial markets, so far, seem unperturbed and Croatia's international debt has been stable.

"Political risk has been factored in for a long time. We expect no changes until after the election and even then only small changes, should the rightwing option win," said Commerzbank analyst Igor Malesev.

REST OF BALKANS LAGS BEHIND

But it is not only Croatia's hopes that are riding on a positive EU assessment. A senior Western diplomat who knows the region well says "the West would like Croatia to be viewed as an incentive, something the rest can follow".

But at the same time, he said, most countries were focused on their own problems and feel in any case that Croatia has it much easier, with strong tourism and no real ethnic splits.

The Balkans lags behind the 10 east European states entering the EU in 2004, and Bulgaria and Romania, due to join in 2007. But Croatia's lead position in the follow-on group is not in question, and its entry will raise morale in the rest of the region that EU membership is not a mirage.

Albania wades in poverty, Bosnia is run by Western officials and NATO. Serbia reels with internal problems while Macedonia's membership application in November will meet with "a long look from the European Commission", said the Zagreb diplomat.

Croatia's economy is almost on level with most future EU members but political criteria, particularly dealing with war crimes, remain an overriding problem.

"On the economic front, reforms, we were really impressed and give the (Croatian) government high marks. Low marks go for cooperation with the tribunal, that was a disappointment," a Brussels-based diplomat told Reuters.

The West was tired of baby-sitting this region torn apart by ethnic wars in the 1990s, the Zagreb diplomat said. "Interest has moved on to the Middle East, and with it the resources".

The November election battle between a nationalist conservative bloc, led by the Croatian Democratic Union (HDZ) of the late President Franjo Tudjman, and the ruling reformist alliance, might further delay Zagreb's membership drive.

Should the HDZ win, as early polls suggest, "the Commission would like to sit back and see what that government is actually doing in real life, so there will be some delays," the diplomat said. Even in the best case, a 2007 entry was unrealistic.

"It took Finland almost three years to conclude talks. If Croatia starts in 2005, can it do better than Finland?"

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