A senior Western source said the Yugoslavian side had agreed in exchange to free nine guerrillas arrested last month trying to cross from Albania.

The BBC Correpondent in Kosovo, Jacky Rowland, says the rebels have been told their fighters could be handed over within 10 days.

The BBC's Jim Fish: "The release is a personal triumph for William Walker"

William Walker, head of the Kosovo Verification Mission, announced the release of the Serb soldiers following five hours of talks at a rebel command center in Likovac, in central Kosovo.

Their capture five days ago had put renewed pressure on the region's fragile ceasefire, with the Yugoslav Army threatening to free them by force if necessary.

The BBC's Jackie Rowland: KLA fighters may be released in the next 10 days

International monitors had expected the soldiers to be handed over on Wednesday morning. But their release was delayed after an apparent last minute hitch in talks between the international negotiators and Kosovo Liberation Army commanders

Mr Walker refused to give details of the agreement or whether it involved an exchange of prisoners. But he said the soldiers' release was ''part of a fair and balanced agreement''.

Fears of new violence

The handover was the result of more than five days of talks brokered by the Organisation for Security and Co-operation in Europe.

Stari Trg: Scene of capture

Yugoslav forces had already moved dozens of tanks and infantry units into the area where the men were being held, prompting fears of a return to full scale conflict which would dash hopes for a political settlement.

During round the clock negotiations, the monitors met with both the KLA and Yugoslav officials in an effort to prevent the region sliding back into the ethnic conflict which had halted on October.

The rebel army wants independence for Kosovo which is 90% ethnic Albanian.

Officials feared Serb forces might resume their military crackdown against Albanian separatists if the soldiers were not freed quickly.

Monitors under fire

The international monitors were sent into the region after a truce was called in October. But the verification mission has been criticised as weak and understaffed since beginning its work.

Knut Vollebaek: "We have reached agreement"

Our correspondent says if the soldiers are handed over without any escalation in violence, it will represent an important political victory for the mission.

Knut Vollebaek, head of the OSCE, has urged both the Albanians and the Serbs to begin a political dialogue aimed at ending the conflict.

"Every day that passes represents a danger for a new escalation of the violence," he said.