Ministers said they would seek a speedy lifting of all restrictions against Kosovo and Montenegro, including the oil embargo.

But they said that in the case of Serbia - apart from the Kosovo region - only those sanctions that affect the civilian population would be revoked.

That would include the lifting of bans on air and sporting links.

However, the ministers agreed there was a need to find ways of providing extra support for municipalities in Serbia led by democratic forces.

Stability summit

The BBC's Oana Lungescu in Brussels: "Some foreign ministers called for the immediate lifting of sanctions"

The foreign ministers, meeting in Brussels, also agreed to contribute $1.5m towards the cost of a Balkan Stability summit in Sarajevo at the end of the month.

And they settled a dispute over the location of a headquarters for the European reconstruction agency for the region.

It is to be located in Thessaloniki, northern Greece, with an operational centre in Kosovo's regional capital, Pristina.

The budget of the agency, estimated at $500m for the first year, will be placed before the European Parliament in September.

Ties resume

Russia has played a key role in the Kosovo peace plan

Meanwhile Nato and Russia have announced that they intend to resume formal links after a break of nearly four months.

Nato officials say that talks will be held on Tuesday at Nato headquarters in Brussels.

The situation in Kosovo and Russia's role in peacekeeping operations will be the sole topic of the agenda.

The Russians froze all formal contacts with Nato and withdrew their military representative at alliance headquarters last March in protest at the allied air strikes against Yugoslavia.

Soldiers killed

The US peacekeeping effort suffers its first casualties

Earlier in Kosovo itself it was announced that two American soldiers had been killed in a road accident in Kosovo on Sunday - the first fatalities suffered by the US peacekeeping presence since they entered the province.

Three others were lightly injured.

The accident occurred when an armoured personnel carrier overturned during a routine patrol near the town of Domorovce in eastern Kosovo.

The vehicle apparently came off the road after losing a track.

US forces have launched an investigation.

Elsewhere in the province another mass grave has been uncovered in the northern town of Podievo near the border with Serbia.

Thirteen corpses have been uncovered by local authorities, under the supervision of war crimes investigators from the Hague.

The grave is thought to contain the bodies of an entire family - including four children.

Opposition fractures

In Serbia opposition leader Zoran Djindjic has announced that he will not cooperate with a rival leader, Vuk Draskovic.

In a newspaper interview Mr Djindjic, head of the Democratic party, the leading force in the Alliance for Change coalition, described Mr Draskovic's proposals on how to end the rule of President Milosevic as "unacceptable."

Mr Draskovic, who briefly served as minister under Mr Milosevic, has called for the formation of a transitional government followed by early elections.

On Sunday Mr Draskovic told a rally of supporters that returning Yugoslavia to the international community was the most important task facing the country.

Way forward

By Mr Djindic says such a plan raises the spectre of Mr Milosevic remaining in power and the only way forward was for the president to resign first.

"Yugoslav President Milosevic must go first ... then, after that, reform, reconstruction and normalization of relations inside Yugoslavia and with the world can start," Mr Djindjic is quoted as saying.

"The issue is whether you are on the side of the regime or on the side of the people. If you are backing the people, the only request, which cannot be moderated, is that Milosevic must go," he said.