By William Drozdiak
Washington Post Foreign Service
Saturday, September 9, 1995; Page A01

GENEVA, SEPT. 8 -- Meeting for the first time in nearly two years, the warring parties of the former Yugoslavia approved a U.S.-engineered set of principles today, designed to steer them toward an enduring settlement of Bosnia's 40-month-old war.

The agreement, reached after an intensive round of American shuttle diplomacy, raised hopes that the Balkan belligerents are finally prepared to seek a peaceful solution after recent shifts on the battlefield -- including NATO airstrikes against the Bosnian Serbs -- that have altered the momentum of the fighting.

The chief U.S. negotiator, Assistant Secretary of State Richard C. Holbrooke, described the deal as "an important milestone in the search for peace." But it still fell well short of resolving the intractable disputes over who will control what territory -- disputes that have doomed earlier agreements among Bosnia's Serb, Croat and Muslim communities and bogged down several years of international mediation and peace negotiations.

President Clinton, in a statement issued in Washington, also called the agreement a milestone on the road to peace but cautioned, "Much remains to be done in translating these principles into a final peace agreement."

Foreign ministers from Bosnia, Croatia and Serbian-led Yugoslavia endorsed the American-brokered plan, which would guarantee Bosnia's future existence as an independent state but divide its territory almost equally between two "democratic entities" -- a Muslim-Croat federation and a Serb republic.

The accord would permit each side to be self-governing under its own constitution, while preserving the notion of a unitary state. Both sides would also have the right to establish "parallel special relationships" with neighboring countries.

It also calls for freedom of movement within Bosnia's borders and would allow displaced persons to return to their homes. A commission would be set up to enforce international standards of human rights in a country that has seen widespread violations.

The plan builds on a proposal by the five "contact group" nations -- the United States, Russia, France, Britain and Germany -- to maintain Bosnia's international status as a single state under present borders but with 51 percent of the land controlled by the Muslim-Croat federation and 49 percent by the Serbs.

However, the Serbs hold 70 percent of the land after 40 months of warfare and are insisting on controlling part of the capital in any peace settlement, something that is anathema to the Muslim-led government in Sarajevo. And in Croatia, the Serbs are still refusing to give up the resource-rich area of Eastern Slavonia that they captured shortly after Croatia declared independence in 1991.

Acknowledging the difficulties in working out an acceptable map, Holbrooke said today's agreement "does not constitute the end of the tragedy in the Balkans. Far from it. Significant differences exist between the sides -- differences that will require continued intense consultations."

Holbrooke said he and the European Union's special envoy to Yugoslavia, Carl Bildt, will return to the region next week for a fresh round of shuttle diplomacy aimed at cracking the outstanding conflicts. A top priority, he stressed, would be an effort to persuade Serbia to recognize that Eastern Slavonia should be considered part of Croatia.

Holbrooke also said that getting the parties to implement what was agreed today would be a formidable problem. For example, the Bosnian Serbs and the Muslim-Croat alliance will now have to find a way to reconcile two constitutions within one state.

In addition, they will also have to thrash out the nature of "parallel special relationships with neighboring countries." The Bosnian Serbs have demanded the right to form a confederation with Serbia in the same way that Bosnia has linked up with Croatia. But the Bosnian government says granting the Serbs such a right would violate the authority of the unitary state.

Despite the daunting agenda, diplomats involved in the talks said the shifting fortunes of the Balkan conflict may have improved the chances of peace. They said Croatia's lightning offensive in the Serb-held Croatian region of Krajina in August destroyed the myth of Serb invincibility, while mounting political dissension within the Serb leadership and the toll exacted by Western airstrikes could be prodding Serbs toward an early settlement.

Despite the accord here, NATO air raids were stepped up today to exert further pressure on the Bosnian Serbs to remove all heavy weapons from a 12 1/2-mile exclusion zone around Sarajevo and allow unfettered access by road and air to the besieged capital. There was no indication that the Serbs were ready to meet the demands set out by NATO and the United Nations.

"Airstrikes have been going on, but we're still no nearer to seeing the Serbs willing to comply," a NATO official said. "We have this kind of stalemate situation almost."

In Washington, Secretary of State Warren Christopher said, "It's really in the hands of General {Ratko} Mladic and the Bosnian Serbs as to how long that {bombing} campaign will continue," referring to the Bosnian Serb military leader.

U.S. officials in Washington said NATO is considering the use of cruise missiles against some targets. The missiles, which cost about $1.2 million apiece, are self-propelled bombs that can follow a preset course to the target with great accuracy.

The Navy has two surface ships and a submarine in the Adriatic equipped with Tomahawk cruise missiles, but administration officials declined to say whether a decision had been made to fire any of them. The Navy did report that a second aircraft carrier, the USS America, arrived in the Adriatic today to relieve the USS Theodore Roosevelt, which is to return to the United States.

At the Geneva talks, diplomats said the fact that the warring parties had agreed to show up in the same room together and shake hands was something of a breakthrough after the recent months of bloody fighting.

Bosnian Foreign Minister Muhamed Sacirbey said the meeting was successful largely because Serbia had effectively renounced any annexation of Bosnian territory. "We have cleared up once and for all the possibility of a Greater Serbia' being created on our doorstep," he said.

Last week, in what the United States hailed as a crucial new development, Serbian President Slobodan Milosevic declared he would assume full political responsibility for negotiating the fate of the Bosnian Serbs.

Milan Milutinovic, a close ally of Milosevic and the foreign minister of Yugoslavia -- which comprises the republics of Serbia and Montenegro -- led a Serb delegation that also included Nikola Koljevic, vice president of the Bosnian Serbs' self-styled state, and its foreign minister, Aleksa Buha.

The appearance of Bosnian Serb representatives as part of a joint Serb delegation -- even as the Western bombing raids persisted -- was also cited as clear evidence that the Serbs are now interested in bringing the war to an early close. Previously, the Serbs said they would boycott the talks if the bombs continued to fall.

But the Serbs' political leader, Radovan Karadzic, stressed in a statement on Bosnian Serb television that while "the door is now open to peace," at the same time, "only verbal agreement was given in Geneva; nothing was signed."

Karadzic spoke in Pale, the Bosnian Serb headquarters 10 miles from Sarajevo. He and Mladic could not travel to Geneva because both are under indictment by an international war-crimes tribunal. Correspondent Rick Atkinson in Berlin and staff writer Bradley Graham in Washington contributed to this report.