The three men - two Australians and one Yugoslav - had been working in Yugoslavia for the aid agency, Care Australia (CARE), at the time of their arrest two months ago.

The Australian Government described the decision as incomprehensible. The Foreign Minister, Alexander Downer, said the two men were completely innocent.

The trial verdict was announced as signs emerged in Belgrade of a new attitude to the peace negotiations on ending the Kosovo crisis.

BBC's Jim Fish: The severity of the sentences has shocked many people

And an US aid agency said it was planning to make air drops to displaced people within the Serbian province for the first time.

International observers had been barred from the aid workers' trial, which began on Wednesday.

However journalists were allowed in to hear the verdicts of the five-man military panel.

Steven Pratt pictured with his wife

CARE worker Steven Pratt was sentenced to 12 years, and Peter Wallace was handed a four-year term.

A Yugoslav employee of the organisation, Branko Jelen, received a six-year term.

When the sentences were read out in court, Jelen's mother cried out, "Why did you do this to my son? He's not guilty."

The defendants have been given three days to appeal.

The trial went ahead despite appeals from UN Secretary-General Kofi Annan and South African President Nelson Mandela, and several visits by the agency's head and former Australian prime minister, Malcolm Fraser.

Steve Pratt was charged with organising an espionage network and his colleagues with helping him. They denied the charges.

The two Australians were arrested as they tried to leave Serbia for neighbouring Croatia.

They were carrying files and computers which the Yugoslav authorities said contained sensitive information intended to be passed to Nato.

Signs of hope in peace talks

Russia's Balkans envoy Viktor Chernomyrdin has returned to Moscow after declaring himself "very satisfied" with talks held with Yugoslav President Slobodan Milosevic on Friday.

Novi Sad oil refinery burns

After 10 hours of talks, Yugoslavia issued a statement saying it accepted the general principles for a peace deal drawn up by Russia and the other seven G8 nations earlier this month.

Nato leaders reacted cautiously on Saturday to the diplomatic moves. Secretary General Javier Solana said Nato welcomed "any diplomatic effort to help Belgrade accept the position of the international community."

The alliance's supreme commander, Wesley Clark, emphasised the air campaign was having a "significant impact" on Yugoslav forces.

As Mr Chernomyrdin left Belgrade, Nato jets began another night of air strikes as the alliance signalled it would take advantage of improving weather conditions to step up its air campaign against Yugoslavia.

There were attacks on the northern town of Novi Sad, where local media said the television building was destroyed and power cut off.

(Click here to see a map of latest Nato strikes)

Explosions were also reported at the Batajnica airfield near Belgrade. Nato said it had been a successful night with more than 600 sorties and numerous military targets hit.

Air drops

An international aid organisation has announced that it is to begin dropping food to displaced people inside Kosovo within the next few days.

The International Rescue Committee announced in New York that it would fly two chartered Russian planes from Italy and drop enough food to feed 15,000 people a day.

Washinton Correspondent Paul Reynolds: "Operation co-ordinated with Nato"

Nato has resisted pressure to make food drops for the thousands of people living in the hills in Kosovo because of the risk that their planes would be shot down.

But the aid agency said it had informed the Yugoslav Government about the plan this week and that officials had had offered no negative comments.

The food will be vegetarian, to accommodate possible religous requirements by Albanian Muslims.

The cost will be a $1m a month, some of which will be paid for by the US government.

So far, the Yugoslav government has not given official permission for the air drops, and a foreign ministry spokesman said they woiuld be viewed as a hostile act.

• Belgrade diplomacy leaves Nato unmoved
• Text of Yugoslav statement
• Aid group plans Kosovo air drops
• Nato prepares for 'Phase Three'
• KLA go on the offensive

---