The plan, which includes the abolition of the Federation, could be a prelude to a later bid for independence by Montenegro.

But ultra-nationalist Serb leader Vojislav Seselj has reacted strongly to proposal, saying the Yugoslav army would intervene if Montenegro attempts to secede.

He dismissed the project as nonsense.

He said: "If anyone tries to separate themselves by force, we know what will follow - the use of all constitutional means to prevent it.

The BBC's Jacky Rowland: "A clear challenge to President Slobodan Milosevic"

"The Americans would do the same if California decided to secede."

The Montenegro plan calls for a looser association to replace the federation, to be known as the Commonwealth of the States of Montenegro and Serbia.

Under the proposal each republic would have control over economic and foreign affairs, and they would have separate army commands.

The plan will now go to Serbia for consideration.

Montenegrin President Milo Djukanovic has warned that if Belgrade fails to agree to the proposed changes, he would call for a referendum on independence.

BBC Belgrade Correspondent Jackie Rowland says many in Belgrade's corridors of power see the plan as outright rebellion.

Serbian opposition

Djukanovic insists Montenegro must decide its own sovereignty

Montenegro (population 630,000) and Serbia (population 10 million) are the only two republics left in Yugoslavia.

Mr Milosevic, whose current official capacity is notionally based on unity of the rump of Yugoslavia, is believed to be almost certain to reject the proposal.

He tried unsuccessfully to stop Slovenia, Croatia and Bosnia from breaking away from Yugoslavia.

President Djukanovic said recently that Serbia would be given six weeks to accept or reject the proposal before a referendum on independence would be called.

In contrast to Serbia, Montenegro has maintained good relations with western governments, but the United States has urged President Djukanovic to do nothing that would provoke further instability in the Balkans.

The Montenegrin leader was in Moscow this week trying to persuade Russian leaders to support his efforts to win greater autonomy from Belgrade.