By Lee Hockstader
Washington Post Foreign Service
Thursday, March 19, 1998; Page A29

BELGRADE, March 18—Yugoslav President Slobodan Milosevic continues to defy Western demands that he end a police crackdown on ethnic Albanians in the province of Kosovo by Thursday or face new sanctions that could cause further damage to his country's feeble economy.

Milosevic has done little to comply with demands that he withdraw special paramilitary police from Kosovo, according to diplomats in Belgrade, the Yugoslav capital. Serbian President Milan Milutinovic said in a statement reported tonight on state television that Belgrade is prepared to offer Kosovo "a great degree of self-rule," but he made no mention of the ethnic Albanians' fundamental demand for independence.

Milutinovic also said Serbia was prepared to accept mediation in talks with the Albanians by the Organization for Security and Cooperation in Europe -- but only if Yugoslavia is readmitted to the 54-nation body, a demand unlikely to be accepted by the West.

In a further sign that the violence has not run its course, one ethnic Albanian was killed and several others were injured today when Serbian police fired on and beat stone-throwing pro-independence demonstrators in the western Kosovo town of Pec, according to reports from the region. In the capital, Pristina, tens of thousands of ethnic Albanians marched for independence, a demand that Belgrade refuses to discuss.

More than 80 ethnic Albanians have been killed by Serbian police and paramilitary forces in recent weeks in Kosovo. Coupled with Milosevic's apparent intransigence, the unrest has deepened the already perilous conflict in Kosovo, a southern province of Serbia where ethnic Albanians outnumber Serbs 9 to 1 but suffer under an apartheid-like system in which the Serbs rule. Serbia is the largest and dominant republic of what remains of Yugoslavia.

U.S. Balkans envoy Robert S. Gelbard succeeded today in persuading ethnic Albanian leaders in Kosovo to form a committee to consider talking with Serbian officials. The foreign ministers of France, Germany and Russia also are visiting the region this week in a concerted effort to exert further pressure to end the police crackdown. But there is little real indication that either side is softening its stance.

In his statement tonight, Milutinovic, who heads a government delegation seeking talks with the Kosovo Albanians, also said the government would extend protection for the International Committee of the Red Cross if it resumed its work in Kosovo, which was suspended after the organization received threats last week.

There were signs that Belgrade was bracing for sanctions. Diplomats said banks here have been closing some foreign accounts and recalling funds from abroad in the face of Western threats to seize Yugoslav state assets overseas. In general, say analysts, Milosevic seems prepared to suffer additional economic hardship in the form of sanctions rather than back down on Kosovo, which many Serbs consider the cradle of Serbian civilization. His government has rejected suggestions for international mediation and has put forward no significant proposal for defusing the crisis through increasing self-governance or restoring the autonomy in Kosovo that Milosevic, as leader of Serbia, revoked in 1989.

"Milosevic has felt that any step toward the Albanian community would be seen as a sign of weakness by the Serbian side, which is geared in a nationalist direction," said Novak Pribicevic, a former Yugoslav ambassador to Albania. "Nothing works with the regime here except pressure, economic or military."

In its meeting in London March 9, the six-nation "contact group" -- the United States, Britain, France, Germany, Italy and Russia -- gave Belgrade 10 days to comply with the demands that it de-escalate the conflict in Kosovo. So far, say diplomats here, there has been no apparent progress on the two major items, a withdrawal of special police and negotiations with the Albanians. Major aid organizations are still not working in the region.

The group threatened "further international measures" against Yugoslavia, including an arms embargo and a freeze on government assets held abroad and a moratorium on government-financed export credits for trade and investment, if it failed to defuse the crisis. It has scheduled a meeting in Washington next Wednesday to assess Yugoslavia's compliance.

In Kosovo today, Gelbard condemned what he called "outrageous acts" of Serbian intimidation and violence in Kosovo, including death threats against U.S. diplomats and journalists. Gelbard said Serbia's response to international pressure has been "extremely poor," and he warned that the United States is serious about hitting Belgrade with further sanctions.

Washington wants "serious and biting sanctions in what is already, in our view, an economic situation in the Federal Republic of Yugoslavia of serious decline," he said.

Russia has refused to go along with some of the threatened sanctions, including the asset freeze. But Russia is a relatively minor economic player in the Balkans, and Western diplomats said the threat of sanctions had already taken a toll on export-oriented businesses in Yugoslavia and on foreign investors.

Special correspondent Colin Soloway in Pristina contributed to this report.